The IRS is no longer allowing taxpayers to use the “universal” wallet approach starting in 2025. This is the method basically every crypto tax software has used historically and thus is a major departure from what most crypto investors have become accustomed to using. Moving forward, the IRS is requiring cost basis be calculated on a wallet-to-wallet/account-by-account basis.
IRS Changes Requirement for Crypto Basis Calculations
Our firm has never offered crypto bookkeeping as a service. Our strength has always been with tax strategy and analysis rather than ledger reconciliation. We are friendly with some other crypto CPAs and have always referred that type of business out to them.
There has never been a day we have been so happy with that decision as today, as the changes required by the IRS as outlined in the final regulations and Revenue Procedure 2024-28 are going to be an absolute nightmare to deal with – at least in the short-term.
For some context, basically since crypto tax software has been around almost all of these programs have used what the IRS calls the “so-called universal or multi-wallet approach” for determining cost basis. Under that method, you treated your entire pool of crypto as one giant wallet – regardless of where it was actually held. Whenever you had activity, the cost basis was determined by:
- The accounting method you chose (FIFO, HIFO, etc.)
- The cost basis you had for that asset across your entire portfolio
Starting in 2025, the IRS has nixed that entire approach. Moving forward, taxpayers will be required to keep track of their cost basis (and corresponding gains) on a “wallet-by-wallet or account-by-account basis”.
So why the change?
Crypto’s Broken Reporting Requirements
On August 29, 2023, the IRS published REG-122793-19 which proposed – among other things – broker requirements for reporting cost basis and gross proceeds. This proposal requires wallet-by-wallet basis accounting.
The basic rationale behind this is that the IRS is requiring exchanges to report and keep track of activity and cost basis on their platform – and the exchanges have no way of knowing what someone’s cost basis would be from a universal wallet/ledger. To try to alleviate any discrepancies/manual adjustments by taxpayers, the wallet-by-wallet approach is being mandated.
This makes sense in theory, but understandably had some significant pushback during the public comment period:
“In response to the 2023 proposed regulations, some comments addressed the need for transitional guidance, stating that many taxpayers have interpreted FAQs 39-41 as permitting, or at least not prohibiting, specific identification of units or application of the FIFO rule based on a so-called universal or multi-wallet approach because the FAQs do not explicitly limit the specific identification or FIFO rule to units held within a single account, wallet, or address, and noting that the rules of proposed § 1.1012-1(j) would apply differently from the basis identification rules adopted by those taxpayers based on their reading of FAQs 39-41. The comments expressed the view that transitioning from the universal or multi-wallet approach to the single wallet or account-based rules in the 2023 proposed regulations, if adopted in the final regulations, could lead to ongoing discrepancies between a taxpayer’s basis records and the basis reported to the taxpayer by brokers on Forms 1099-DA, Digital Asset Proceeds From Broker Transactions and that these discrepancies could be further exacerbated by the limitations of current basis-tracking software.”
The IRS listened to this portion of the public comments and pushed back the start date:
“Section 1.1012-1(h) and (j) of the 2024 final regulations will apply to all acquisitions and dispositions of digital assets on or after January 1, 2025.”
So taxpayers have been given some breathing room and this only affects transactions in 2025 or later.
However, that’s still going to leave them with a lot of work to do and decisions to be made.
Safe Harbor to Allocate Basis
Rev. Proc. 2024-28 allows a safe harbor for taxpayers to allocate the basis of their assets – transitioning that basis from a universal wallet approach to specific wallets for the now-required wallet-by-wallet reporting. They note (emphasis added):
“Subject to the requirements set forth below, this revenue procedure generally permits taxpayers to rely on any reasonable allocation of units of unused basis to a wallet or account that holds the same number of remaining digital asset units based on the taxpayer’s records of such unused basis and remaining units. The allocation must be a reasonable allocation within the meaning of section 5.02 of this revenue procedure and must be made as of January 1, 2025; however, the taxpayer may identify the method of allocation and may comply with the requirements set forth in section 4.02 of this revenue procedure at a later date to the extent permitted by section 5.02(4) or 5.02(5)(b) of this revenue procedure.”
Digging into Sections 5.02(4) and 5.02(5)(b), these sections only extend the deadline if you do not have any crypto activity. Once any activity occurs, the deadline triggers. Even if you do not have any activity, you still must meet the requirements before the due date of the tax return. These sections note:
“(4) A taxpayer making a specific unit allocation must satisfy the requirements set forth in section 5.02(1) of this revenue procedure and complete the specific unit allocations described in section 5.02(2)(a) of this revenue procedure before the earlier of:
(a) The date and time of the first sale, disposition, or transfer by the taxpayer of the same type of digital asset completed on or after January 1, 2025, or
(b) Either:
(i) The due date (including by extension) of the taxpayer’s Federal income tax return or Form 1065, U.S. Return of Partnership Income, for the taxable year that includes January 1, 2025 (the 2025 return); or
(ii) If the taxpayer is not otherwise required to file a 2025 return, the last date for filing the 2025 return (without extensions) of the type of return that would be applicable to the taxpayer if the taxpayer were required to file a 2025 return.”
Accounting Method Requires Informing Broker
This notice still allows taxpayers to use different accounting methods (FIFO, HIFO, Specific ID, etc.) for calculating their cost basis. Of great importance, it requires notifying the brokers beforehand of the election you are making. Otherwise, the brokers will default to FIFO.
Informing the exchanges/anyone deemed a broker beforehand is going to be extremely important because they will be required to issue 1099s (Form 1099-DA) starting in 2026. On that 1099, the cost basis reported will be based on what you tell the exchange to do. If you do not make any special election, the exchange will default to FIFO and calculate it that way. As we mentioned in our article on the different accounting methods, FIFO can be a very bad choice for some types of investors.
Bottom Line
Crypto reporting has needed an overhaul for a while. It has largely been the Wild West and the tools that are available for tracking have been subpar. In the long-term, this change may reduce the burden on taxpayers by placing the onus of reporting and tracking on the exchanges themselves. But for 2025 especially, it is likely to cause significantly more stress and confusion. This may be the year for crypto investors to engage a firm specializing in crypto bookkeeping to help them through the transition. If you need any referrals, we have a few firms we can recommend!
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
