As we approach 2025, I want to inform you of some new crypto tax guidance that will impact you, as well as inform you of an obligation that you have before year-end.
Summary: The IRS has implemented a new method of accounting for 2025. In order to transition from the old method of accounting to the new method, you need to sign and date a document before January 1, 2025 to ensure compliance. This plan does not need to be submitted to the IRS, but you will need to keep a copy of it for your records in case you are ever audited.
Change from Universal to Wallet-by-Wallet Accounting – Since 2017, Crypto Tax Girl (and most other tax firms and crypto tax software) has used a universal method of accounting for all of our clients. This means that all crypto transactions across all wallets and exchanges were treated as part of a single, unified ledger. The result of this was that anytime you sold, traded, spent, gifted, lost, or donated your crypto, your cost basis was pulled from your entire pool of holdings, regardless of where the crypto was held. As of January 1, 2025, the IRS is requiring that all taxpayers use a wallet-by-wallet method of accounting. This means that each wallet or exchange account is treated as a separate ledger, and the cost basis is tracked individually for assets held within that wallet.
Safe Harbor Plan – If you have used the universal method of accounting in the past, the IRS released Rev Proc 2024-28, which details a safe harbor method of how to convert to the wallet-by-wallet method and allocate the cost basis of all of your assets held on 1/1/25 to the assets held in each of your wallets and exchanges on that date. The good news is that taxpayers can choose how to allocate their cost basis; the bad news is that taxpayers have to choose an allocation method and document their plan by January 1, 2025 to take advantage of the safe harbor and ensure compliance. The document does not need to be submitted to the IRS, but you will need to keep a copy of it for your records. We will also request a copy of it for our records when we perform your crypto reconciliation. If you are ever audited, you will need to provide this to the IRS. Also please note that the actual allocation doesn’t need to be done until 2026 at the latest, but the allocation method has to be chosen ASAP. We will assist you in correctly performing the allocation after we reconcile your 2024 transactions. Please click here to read the “Safe Harbor Instructions” and here to download the “Digital Asset Allocation Plan” and follow all instructions before January 1, 2025.
FIFO Requirement – To date, taxpayers have been able to use various accounting methods including FIFO, HIFO, LIFO, OPTI, etc. when calculating their crypto gains and losses. Taxpayers have also had the luxury of being able to run multiple reports at the end of the year using various accounting methods then choosing the most advantageous method for that year. Starting in 2025, the default method of accounting will be first-in-first-out (FIFO) per wallet. Rev Proc 2024-28 mentions that a specific-identification method of accounting (HIFO, LIFO, OPTI etc) can be used post-2025; however, in order to use this method, you must document and inform the exchange which lot you want to sell prior to conducting the transaction. If you ever want to do a specific identification method of accounting on one or more of your wallets or exchanges, please let us know and we would be happy to help you document and account for this. Please note that using the specific identification method of accounting is more complicated from an accounting perspective and will require a lot of manual work, so we only recommend doing this on large transactions with a material impact.
1099-DA – Prior to 2025, crypto has primarily been a self-reported asset and taxpayers have generally not received 1099s for their crypto activity. Starting in 2025, exchanges will be required to provide all users with Form 1099-DA stating the user’s proceeds for all transactions. In 2026, both proceeds and cost basis will be reported on Form 1099-DA. It has never been more important than now to ensure that your crypto transactions are fully reconciled.
As you can see, there will be quite a few changes made to the way we calculate your gains and losses in 2025; however, we still have flexibility to decide how to calculate your gains and losses in 2024. After we reconcile your 2024 transactions we will help you choose the accounting method for 2024 that is most advantageous to your personal situation, and we will help you understand how your safe harbor allocation method will impact you going forward.
If you would like to read Rev Proc 2024-28, which describes everything above in more detail, feel free to do so here: https://www.irs.gov/pub/irs-drop/rp-24-28.pdf
I know that these changes are a little difficult to understand, and we would be happy to answer your questions; however, given that the deadline is two weeks away, and we are approaching the holidays, we may not be able to get back to everyone before January 1, 2025. We strongly recommend that you watch the video we created that explains the new rules in more detail and walks you through some examples. When in doubt, apply the Highest Cost Allocated First method to your Digital Asset Allocation Plan.
Next Steps:
- Watch the video I made explaining the new rules in more detail (not required, but recommended).
- Read the Safe Harbor Instructions
- Download and complete the Digital Asset Allocation Plan
- Save a signed and dated copy of the Digital Asset Allocation Plan to your files. We will request a copy when we work on your 2024 reconciliation.
