If you’ve been following recent IRS guidance on crypto taxes, you’ve probably heard about the required shift from the universal (pooled) cost basis method to the wallet-by-wallet method starting in 2025.
But here’s the problem:
👉 Many investors didn’t make that transition before their first crypto trade in 2025.
👉 And according to IRS Notice 2026-20, that timing actually matters.
So what now?
Let’s walk through what the rule says, what it means, and most importantly, what you can do if you’re already behind.
What the IRS Actually Requires (And Why Timing Matters)
Under IRS Notice 2026-20:
Cost basis must be allocated to each wallet by the date of the first sale of that asset in 2025.
This is a big shift.
Historically, many investors:
- Tracked crypto using a single pooled method
- Applied FIFO or HIFO across all wallets
That approach is no longer acceptable.
Starting in 2025:
- Cost basis must be tracked separately by wallet
- Allocation must be done before you sell, not after
The Real-World Problem
Let’s be honest, this rule assumes a level of tracking that most investors (and software tools) simply didn’t have in place at the beginning of 2025.
Common situations we’re seeing:
- Investors continued trading in early 2025 without making the transition
- Some crypto tax software still applies a single global method
- Wallet-level basis reallocation was not formally done
👉 In other words: a lot of people are technically late.
So… Are You in Trouble?
Not necessarily.
The IRS is aware of:
- Data limitations
- Software gaps
- Industry-wide confusion
That’s why 2025 is effectively being treated as a transition year.
But, and this is important:
👉 Relief does not mean “anything goes.”
You still need to take reasonable, defensible steps now.
What You Should Do If You Missed the Deadline
If you did not complete your wallet-by-wallet transition before your first 2025 trade, here’s how to fix it in a defensible way.
Step 1: Reconstruct Your Holdings as of January 1, 2025
Start with a clean snapshot:
- All wallets and accounts
- All assets (BTC, ETH, etc.)
- Total units held per asset
- Total cost basis per asset and separately by tax lots
👉 This is your “starting point” for the transition.
Step 2: Allocate Cost Basis Across Wallets
You now need to assign each tax lot for each asset to each wallet.
The IRS allows reasonable methods, such as:
- Allocation based on:
- Units held per wallet
- Historical flow of assets
- Specific unit tracing (if records are strong)
👉 The key is:
- Be consistent
- Be reasonable
- Be documented
Step 3: Apply a Consistent Method Going Forward
Once basis is assigned:
- Use FIFO (default) within each wallet
OR
- Use specific identification, if you can properly support it
⚠️ Important:
Most software tools:
- Do not support true wallet-by-wallet Spec ID
- Apply methods after the fact
👉 If that’s your setup, you are effectively using FIFO, whether you realize it or not.
Step 4: Document Everything
This is your protection.
Keep a record of:
- How you reconstructed balances
- How you allocated cost basis
- Assumptions used
- Any data gaps
If you are relying on crypto tax software to do the transition reallocation for you, make sure you understand their methodology, not take it as a magical wand.
👉 If the IRS ever asks questions, this is what you’ll rely on.
Step 5: Avoid “Hindsight Optimization”
This is where people get into trouble.
Do NOT:
- Allocate basis in a way that clearly minimizes taxes after seeing the outcome
- Change methods mid-year
- Apply different logic to different wallets
👉 The IRS is specifically trying to prevent retroactive tax planning.
Can You Still Use Specific Identification?
Technically, yes.
But in practice:
- You must identify the exact tax lot(s) before or at the time of the trade
- You must track:
- Wallet
- Lot
- Cost basis
- Timing
👉 Most investors (and software users) do not meet this standard
So for many:
- FIFO within each wallet becomes the default
What This Means for 2025 Filings
If you missed the timing requirement:
👉 You are not automatically noncompliant
👉 But you must rely on good-faith reconstruction
A defensible position looks like:
- Reasonable allocation
- Consistent methodology
- Clear documentation
- No hindsight manipulation
Looking Ahead: This Only Gets Stricter
Starting in 2026 and beyond:
- Broker reporting (Form 1099-DA) becomes more detailed
- IRS matching improves
- Wallet-level tracking becomes more visible
👉 The window for “fixing it later” will continue to shrink
Bottom Line
If you didn’t complete your wallet-by-wallet transition before your first 2025 trade, you’re not alone.
But you do need to act now.
👉 Reconstruct your records
👉 Allocate cost basis reasonably
👉 Document your methodology
👉 Apply consistent rules going forward
Because in the eyes of the IRS:
How you fix it matters just as much as whether you fix it.
And remember, even if you missed the timing requirement earlier in the year, the transition to the wallet-by-wallet method must still be completed before filing your 2025 tax return, as it is effective beginning January 1, 2025.
