New Digital Asset Safe Harbor. Rev. Proc. 2024-28.

What's New?

The IRS has issued Revenue  Rev. Proc. 2024-28, which mandates a switch from universal cost basis tracking to per-wallet cost basis tracking for cryptocurrency starting January 1, 2025. While this change doesn't affect your 2024 taxes (due April 2025), it may be important to do so earlier as you prepare for any potential trading in tax year 2025. 

Under the current universal method - it assumes all of a taxpayer's digital assets are held in one wallet or account - this is clearly not always the case as the digital asset can be dispersed among multiple wallets or accounts. Upon sale, you could specifically identify the basis for the digital asset sold from the pool of digital assets. Often this would result in a remaining digital asset with used basis and an "orphaned" basis with no digital asset (i.e., a unit of unused basis). Thus, taxpayers who have been using the universal method for years may have a significant number of digital assets with no basis attached. That will now change; the final regulations made it clear that the IRS interpreted Sec. 1012(c)(1) as requiring regulations to be applied on a wallet-by-wallet method. In short, the universal method is no longer permissible.

For taxpayers that used the universal method, Rev. Proc. 2024-28 allows for transition relief to the rules of Regs. Sec. 1.1012-1(j). As part of Rev. Proc. 2024-28, the IRS details the safe harbor rules that gives you protection from having your historical calculations questioned in an audit, as long as you follow the steps to properly allocate your existing crypto holdings to your various wallets. Essentially, your records need to match your wallet balances before January 1, 2025.  

The intention of the this transition relief is to synchronize taxpayer records and broker records, so that brokers' Forms 1099-DA, Digital Asset Proceeds From Broker Transactions, and taxpayers' Forms 8949, Sales and Other Dispositions of Capital Assets, better align when brokers begin reporting basis occurring in 2026 and future years.

What should you do before January 1, 2025? Here are some suggestions:

• Review your current crypto holdings and transactions across all wallets and exchanges; move all digital assets into one account on or before Dec. 31, 2024. Moving all digital assets into one account could reduce the administrative burden of meeting the safe harbor because allocating remaining unused basis. Also, having one account is generally simpler than allocating basis across multiple accounts.
• Ensure all your wallets and exchange accounts are up to date in your preferred crypto tax software. Some crypto tax software will allow you to generate an inventory report, which could be a way to specifically allocate unused basis in accordance with the safe harbor. Also, make sure the crypto tax software allows you to allocate your basis using a wallet-by-wallet method. Finally, verify that the software does not double-count previously used basis.
• Is selling an option that aligns with your current financial situation? Maybe liquidating all of their digital assets before Jan. 1, 2025 would eliminate the need for allocating unused basis and eliminate the complex tax administrative burden to meet the safe-harbor requirements. 
• If you plan to hoDl, decide on a cost basis reallocation method. The IRS is offering a one-time safe harbor to allocate any unused cost bases to specific wallets or accounts. You have two options:

(1) Specific Unit Allocation.

Assign unused cost bases to specific digital assets in each wallet: You do this by manually assigning specific purchases to specific wallets. For example, you purchased an Alt Coin in December 2023 that sits in your Coinbase wallet 1, however, your Bitcoin from June 2024 went to your cold wallet 2. You need to complete and assign the cost to Wallet 1 and Wallet 2 before making any sales after January 1, 2025. 

(2) Global Allocation.

Spread the unused cost bases evenly across all assets in each wallet: With this method, you create your own rule for how you will assign your crypto to your different wallets, and document it before January 1, 2025. For instance, your rule might be “Wallet 1: Purchases before 2024, and  Wallet 2: Purchases after 2023”. With this option, you have until your 2025 tax return is due, to complete the allocation. 

• Keep detailed records of your assets in each wallet, including their cost bases and purchase dates.
• If you're using a crypto tax software, check if they support the transition to per-wallet tracking and follow their guidance for declaring your cost basis reallocation method.
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Takeaway

• The safe harbor one-time allocation is irrevocable, applies only to capital assets (i.e., both the unit of unused basis and the remaining unit must both be capital assets), and under current available guidance, must be completed by Jan. 1, 2025. 
• You must maintain sufficient records identifying the total remaining digital assets in each account, the total units of unused basis, the original cost basis of each unit of unused basis, and the acquisition date of the digital asset to which the unused basis was originally attached. 
• Your allocations must match your wallets.
• Your allocations should make sense - you can't cherry pick and assign certain coins to a lower wallet and others to a higher wallet without reason.
• Remember, after January 1, 2025, you'll need to track the cost basis separately for each wallet and exchange. This means every transaction, cost basis, and sale must be recorded separately for each wallet or account.