# New IRS Rules Transform Digital Asset Reporting: What You Need to Know

> Essential Updates for DeFi Platforms, Wallet Developers, and Web3 Builders

**Published by:** [BUIDLER.xyz](https://buidler.xyz/)
**Published on:** 2024-08-06
**Categories:** crypto, taxation, tax, crypto-tax
**URL:** https://buidler.xyz/new-irs-rules-transform-digital-asset-reporting-what-you-need-to-know

## Content

Starting January 1, 2025, the IRS is implementing significant changes to how digital assets must be tracked and reported for tax purposes. The most notable change: taxpayers can no longer use the "universal wallet approach" – treating all their digital assets as if held in a single account, regardless of their actual location.Understanding the New FrameworkThe End of Universal TrackingPreviously, taxpayers could track their digital assets across multiple wallets and exchanges as if they were all in one account. This flexibility allowed for simplified basis tracking and strategic tax planning. Under the new regulations, each wallet and broker account must be treated separately.New Basis Tracking RequirementsBroker-held Assets: Without specific identification at the time of sale, brokers must use the First-In, First-Out (FIFO) method to track basis.Self-custodied Assets: Taxpayers can establish standing rules in their records to identify which units are being sold, provided these rules clearly document which assets are being removed from the account.Transition ReliefThe IRS recognizes the complexity of this change and has provided relief through Rev. Proc. 2024-28 to provide taxpayers a safe harbor to assist in transitioning to the multiple-wallet or account basis tracking. Subject to certain limitations, taxpayers may reasonably allocate their remaining unused basis to any wallet or account prior to January 1, 2025.The safe harbor is available only to taxpayers who hold digital asset units that they:Acquire or receive in a transfer prior to January 1, 2025, andHold in their wallet or account as of January 1, 2025.The safe harbor does not apply to any digital assets acquired by or transferred to the taxpayer on or after January 1, 2025. Taxpayers are permitted to make reasonable allocations of units of cost basis among digital asset units held prior to January 1, 2025, IF the following requirements of the revenue procedure are met:Each remaining digital asset unit must be a capital asset in the hands of the taxpayer.Each unit of unused basis must have been originally attached to a digital asset unit that was a capital asset in the hands of a taxpayer.The digital asset unit from which the unused basis is derived and the remaining digital asset unit must be the same type.The taxpayer must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each of the wallets or accounts held by the taxpayer.The taxpayer must be able to identify and maintain records sufficient to show the number of units of unused basis, original cost basis of each unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached.A taxpayer must treat any allocation under the revenue procedure as irrevocable for all purposes of Section 1012.Impact on Digital Asset ManagementCurrent Practices vs. New RequirementsDigital asset management traditionally relies on multiple addresses for:Regular transactions (laptop wallets)Mobile accessCold storage for long-term holdingsRisk managementTransaction categorizationThe new regulations require separate tracking for each address, significantly increasing the complexity of asset management and reporting.Technical ChallengesBasis tracking must now be address-specificExisting tax software may need substantial updatesTransaction history must be maintained separately for each walletReal-time specific identification becomes crucialAction Items for TaxpayersImmediate StepsReview current account structures and usage patternsDevelop clear documentation procedures for each walletEstablish specific identification protocolsAssess current tax reporting software capabilitiesLong-term ConsiderationsEvaluate the need for new tracking systemsDocument standing rules for self-custodied assetsPlan for potential operational changes in transaction processingConsider the impact on transaction flexibility and reporting efficiencyWhy This MattersThese changes represent a fundamental shift in digital asset tax reporting. While the previous system offered flexibility in basis allocation and tax planning, the new regulations prioritize precise tracking and documentation. This shift aligns digital asset reporting more closely with traditional securities but creates unique challenges given the decentralized nature of digital assets.Looking AheadOrganizations and individuals must adapt their digital asset management strategies to comply with these new requirements while maintaining operational efficiency. This may require significant changes to existing processes and potentially new technological solutions. The transition period leading up to January 1, 2025, provides a crucial window for taxpayers to prepare their systems and procedures for compliance with these new regulations. Tax SoftwareThese software options allow for wallet-based cost tracking. Koinly Rotki ZenLedger Octav.Financial CryptoTaxCalculatorRelated LinksGross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset TransactionsThis document contains final regulations regarding information reporting and the determination of amount realized and basis for certain digital asset sales and exchanges. The final regulations require brokers to file information returns and furnish payee statements reporting gross proceeds and...https://www.federalregister.govhttps://www.irs.gov/pub/irs-drop/rp-24-28.pdf

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