December Deadline for “Digital Asset Safe Harbor” Approaching
The 2025 tax year will see a number of implementation changes for owners of digital assets. First, certain brokerages and exchanges will be required to issue Form 1099-DA. Similar to Form 1099-B for stock sales, the 1099-DA (which stands for digital asset), will report key information related to the sale of digital assets. This includes the seller’s Taxpayer Identification Number, date of sale, proceeds of sale and information specific to the broker or exchange.
In addition to Form 1099-DA, the 2025 tax year will bring an end to “universal wallet accounting” for digital assets. Universal accounting allowed taxpayers to manage all owned digital assets in one large “virtual wallet”. This allowed for the aggregation of all similar assets (such as Bitcoin) regardless of their actual stored location (different wallets, exchanges, self-custody addresses). This method is relatively straightforward from a tracking standpoint, as it does not require the taxpayer to account for the asset’s storage location. Basis for the sold digital assets could be applied from any of the “virtual wallet” holdings.
However, beginning on January 1, 2025, digital assets must be tracked on a per-wallet basis. This will require additional record keeping as you will need to report transactions by wallet or where the assets are held. The cost basis for each sale must match the cost basis from that specific wallet. It can no longer be applied from the “pooled” basis of your entire holding.
In order to help taxpayers prepare for the change in guidelines, the IRS issued Revenue Procedure 2024-28. This guidance outlines the “safe harbor” options to taxpayers for assigning any unused basis across account holdings. The Tax Advisor provided a great outline of the “safe harbor” and how to best comply with the change.
What to do Before Year-End
The new IRS guidelines will require more detailed records of purchases and sales of digital assets. To prepare for the expanded requirements, I would recommend:
Audit Your Current Digital Asset Holdings
This includes creating an inventory of each coin, identifying all of your wallets, exchanges or addresses where they are held, and ensuring you have a detailed history of your previous purchases and sales of each asset
Determine Your Cost Basis
It is best to determine your cost basis as of 12/31/2024. This will allow you to implement the “safe harbor” and correctly allocate unused basis if you so desire
Remain Compliant With New Reporting Requirements
Beginning January 1, 2025, begin reporting all digital assets sales per the updated guidance. If you are using crypto tax software, most have already updated to reflect the new guidance. This will allow for accurate contemporaneous records that can be used for your 2025 tax filing
Plan Your Transactions
Since the cost basis is now allocated per wallet, you will have to plan each purchase or sale of cryptocurrency to determine the tax impact. It is important to conduct these transactions with prior planning to ensure the transaction occurs in the desired wallet
It is best to implement a system that complies with the new requirements before the January 1 deadline. This will ensure that all transactions are tracked and reported accurately. While these updated guidelines will require more recordkeeping, it will also promote more organization across accounts.