Key Takeaways for Digital Asset Holders
New Guidance: IRS Revenue Procedure 2024-28 allows taxpayers to allocate basis in digital assets to wallets or accounts for tax purposes as of January 1, 2025. The allocation must be reasonable and can be either specific or global. This is crucial for accurate tax reporting.
Transition Period: The guidance aims to smooth the transition to final regulations effective January 1, 2025. Taking action now helps avoid future complications.
Who’s Affected: If you hold digital assets as of January 1, 2025, this applies to you. This includes assets in wallets or accounts.
Safe Harbor: The IRS provides a “safe harbor” method to allocate unused basis to your assets. Using this method can protect you from penalties if done correctly.
Allocation Methods: You can choose between “specific unit allocation” (aka Spec ID) or “global allocation.” With specific unit allocation, you assign your cost basis (what you originally paid for the crypto) to specific, identifiable units within a wallet or account. With global allocation, you establish a consistent rule for determining the cost basis of units sold from the overall pool of a cryptocurrency you hold within a wallet or account.
Record Keeping is Vital: Meticulous records of your digital asset transactions are essential. This includes purchase/sale dates, basis, and wallet details.
Irrevocable Decision: Once you allocate basis, you cannot change it. Careful planning is crucial.
Key Changes and Deadlines
Tax Basis Tracking: The new regulations require taxpayers to adequately identify digital assets in their books and records no later than the date and time of sale, disposition, or transfer. This applies to both self-custodied assets and assets held by a custodian. You must meticulously track your digital asset transactions, including purchase/sale dates, cost basis, and wallet details.
We cannot emphasize enough that comprehensive record-keeping is crucial to avoid potential penalties or unexpected tax liabilities. Taking screenshots of your holdings from the dashboards of every single wallet is highly recommended.
Spec ID or Global Allocation: You must consistently use either the Spec ID or global method for determining cost basis. If you choose global, you must document this choice before January 1, 2025. For Spec ID, you must document the choice before any sale/disposition/transfer is made starting on January 1, 2025, or the filing deadline for your 2025 tax return (April 2026), whichever comes earlier.
For almost all our clients regardless of the allocation method used, the deadline to remember is January 1, 2025.
January 1, 2026: Brokers will begin reporting the cost basis of crypto assets.
Why You Should Act Before the End of the Year
Avoid Penalties: The Rev Proc highlights that failure to comply with the timeline means “the taxpayer cannot rely on the safe harbor set forth in this revenue procedure, and such failure may result in the assessment of additional tax, penalties, and interest.”
Simplify Tax Preparation: Addressing these changes now will make your 2025 tax filing much smoother and less stressful, ultimately saving you time and money.
Optimize Your Tax Strategy: Proactive planning with one of our crypto tax professionals can help you minimize your tax liability.
What Do You Need To Do
We urge you to take the following steps immediately to ensure compliance with the new regulations.
Document all your wallets and exchange accounts: This covers both hot and cold storage.
Detailed asset breakdown: For each wallet/account, list the specific assets and their quantities along with the date acquired.
Asset origin: Note where each asset was initially acquired (e.g., purchased on Coinbase, transferred from another wallet).
Cost basis: Determine the cost basis for each asset unit using one of the approved methods.
Kugelman Law Crypto Tax Services
If you would like to hire the Kugelman Law crypto tax accounting team to assist with this process, we are accepting clients on a first-come, first-served basis.
However, if you decide not to take advantage of the safe harbor election, we can still provide accounting services in the future, with the understanding that we will be obligated to complete accounting for activity after January 1, 2025 in a manner consistent with IRS new guidelines.
Disclaimer: This information is for general guidance only and should not be considered as a substitute for professional and personalized tax advice.