By: Sharon Yip, CPA
In a pivotal move toward enhancing the clarity of digital asset taxation, the IRS issued Revenue Procedure 2024-28, which provides detailed guidance on allocating the basis of digital assets to wallets or accounts as of January 1, 2025 (defined as immediately after the close of the taxpayer’s day on December 31, 2024). This is a response to the growing importance of digital asset reporting, particularly in light of expanded reporting obligations under Section 6045(g)(3) and the new Form 1099-DA for digital asset transactions.
The rules outlined in this procedure create a framework for taxpayers to transition from prior practices, where many used a “universal wallet” approach to tracking the cost basis of digital assets, to a more granular and wallet-specific basis allocation. While the procedure provides a safe harbor, its requirements are nuanced, and taxpayers will need to meet specific conditions to benefit from these protections.
What is at Stake?
The guidance primarily revolves around how taxpayers must allocate their unused basis—the remaining cost basis of digital assets not yet sold or disposed of—across the assets held in each wallet or account as of the snapshot date of January 1, 2025. The basis is crucial for determining gains or losses when selling, trading, or otherwise disposing of digital assets. If not allocated properly, the risk of overpaying taxes or triggering IRS penalties increases.
The Core Challenges:
- Transitioning from Multi-Wallet to Wallet-by-Wallet Basis Tracking:
Historically, many taxpayers tracked their digital assets across all wallets or accounts as a whole, applying a “universal” basis allocation. Revenue Procedure 2024-28 mandates a shift to wallet-by-wallet or account-by-account basis allocation. This means that taxpayers must now account for which units of digital assets belong to which wallet, adding complexity to the tracking process.
- Comprehensive Recordkeeping:
Taxpayers must keep detailed records for each digital asset unit, including the acquisition date, original purchase price, the date and value of sales or exchanges, and the number of remaining units in each wallet or account as of January 1, 2025. This level of tracking is particularly challenging for individuals or businesses with multiple wallets and large, varied portfolios of digital assets. Any errors in documentation could disqualify them from the safe harbor protections or lead to costly mistakes when reporting transactions.
- Specific Unit vs. Global Allocation Methods:
Taxpayers can choose between two allocation methods:
- Specific Unit Allocation: Here, taxpayers allocate specific units of unused basis to corresponding remaining digital asset units within each wallet or account. This method requires significant precision and recordkeeping, as each unit must be tied to its unique characteristics, such as acquisition date or purchase price.
- Global Allocation: In this method, the taxpayer allocates the unused basis according to a predefined rule (e.g., highest basis first or earliest acquisition date). However, this method doesn’t allow for post-January 1, 2025, discretion, so the allocation rule must be established beforehand. Failing to follow the predefined rule precisely could lead to tax complications and penalties.
- Timing Constraints:
The revenue procedure establishes strict deadlines for completing allocations. If using specific unit allocation, taxpayers must make these allocations before selling, transferring, or disposing of any digital assets on or after January 1, 2025. For global allocation, the allocation method must be described in the taxpayer’s books before the effective date. Given the complexity of these rules, meeting these deadlines is a significant administrative burden.
- Non-Compliance Risks:
Failing to comply with the requirements of Revenue Procedure 2024-28 means losing the safe harbor protections. This exposes taxpayers to potential IRS scrutiny, the risk of additional taxes, and possible penalties. Moreover, it may create discrepancies between the taxpayer’s records and those reported by brokers on Form 1099-DA, leading to audit risks and financial consequences.
- Adjusting Software and Processes:
The shift in regulations will likely require taxpayers to upgrade or adapt their basis-tracking software to meet the new requirements. Many current software platforms are designed to follow the “universal wallet” approach and may not be equipped to handle the wallet-specific tracking required by the new regulations. Also, some crypto tax software providers currently do not provide ending coin balance by account or tax lot details as part of their reporting features. Ensuring that using software that is capable of tracking digital assets on a wallet-by-wallet basis is critical.
- Tax Professionals’ Readiness and the Need for Crypto Tax Specialists:
Many traditional tax professionals are not fully equipped to handle the intricacies of digital asset taxation, particularly with the new requirements introduced in Revenue Procedure 2024-28. While some CPAs are beginning to familiarize themselves with the IRS’s evolving digital asset regulations, the complexity of wallet-by-wallet basis tracking, basis allocation, and compliance with the upcoming Form 1099-DA rules demand specialized knowledge. Taxpayers dealing with digital assets should consider working with a crypto tax specialist who has deep expertise in this rapidly changing field. A crypto tax expert is more likely to understand the nuances of DeFi, NFTs, and other advanced blockchain activities, ensuring accurate reporting and minimizing audit risks. Crypto tax specialists are also well-versed in the tools and software required for detailed digital asset tracking, helping clients avoid the penalties and challenges associated with non-compliance under these new rules.
Conclusion:
Revenue Procedure 2024-28 significantly changes the way taxpayers with digital assets must handle basis allocation. The wallet-by-wallet tracking requirement introduces a new layer of complexity, and taxpayers need to be prepared with robust recordkeeping and compliance processes to meet the IRS’s expectations. Those who do not properly transition to these rules may face substantial penalties and difficulties when filing their digital asset transactions starting in 2025.
Taxpayers are encouraged to work with crypto tax specialists to ensure they fully understand and implement the safe harbor provisions and have the proper systems in place before the January 1, 2025 deadline.