The IRS has introduced significant changes for U.S. cryptocurrency investors. Starting January 1, 2025, crypto cost basis tracking will transition from the Universal method to the Per-Wallet method. This adjustment, detailed in Rev. Proc. 2024-28, will impact how investors calculate capital gains and report their taxes.

What is Rev. Proc. 2024-28?

Rev. Proc. 2024-28 provides new guidance on cryptocurrency cost basis tracking, applying these changes to the 2025 tax year and beyond. It’s a fundamental shift aimed at improving tax compliance and aligning reporting across platforms.

How is Cost Basis Tracking Changing?

Previously, under the Universal method, investors could aggregate the cost basis of coins across all wallets. From 2025, the Per-Wallet method requires cost basis tracking on a wallet-by-wallet basis. Here’s how this affects calculations:

Example of Universal Cost Basis Tracking

• Scenario:
  Saul buys 1 BTC for $20,000 on Exchange A and another 1 BTC for $25,000 on Exchange B. Later, he sells 1 BTC on Exchange B for $30,000.
  • Capital Gain Calculation:
    Using FIFO (First In, First Out), Saul’s gain would be based on the $20,000 BTC cost from Exchange A, resulting in:
    $30,000 – $20,000 = $10,000 gain.

Example of Per-Wallet Cost Basis Tracking

• Scenario:
  The same transactions occur, but under the Per-Wallet method, only Exchange B’s transactions are considered for the sale.
  • Capital Gain Calculation:
    The cost basis is $25,000 from Exchange B, resulting in:
    $30,000 – $25,000 = $5,000 gain.

This change emphasizes the need for precise, wallet-specific recordkeeping.

Why the IRS is Implementing These Changes

Starting in 2025, brokers must issue Form 1099-DA, reporting cryptocurrency transactions. Since brokers can only report on transactions within their platforms, the Per-Wallet method ensures consistency between broker-reported data and investor filings. These adjustments aim to reduce discrepancies, prevent tax evasion, and ensure accurate capital gains reporting.

Impact on Crypto Investors

The new rules require detailed tracking of every coin’s cost basis within each wallet, making meticulous recordkeeping essential. Failing to comply may lead to discrepancies or penalties.

When Do These Changes Take Effect?

The Per-Wallet method becomes mandatory on January 1, 2025, meaning it applies to tax filings for the 2025 tax year (due in April 2026). For the 2024 tax year, the current Universal method is still valid.

How to Prepare for the Transition

To stay compliant, consider these strategies:

1. Consolidate Wallets:
   Reduce the number of wallets to simplify tracking. This is particularly helpful for frequent traders managing numerous wallets.
2. Separate Long-Term and Short-Term Holds:
   Maintain distinct wallets for different holding strategies. Use one wallet for long-term investments and another for disposals, keeping higher-cost-basis assets in the disposal wallet to minimize taxable gains.
3. Adopt Robust Tracking Tools:
   Use specialized software to track wallet-specific transactions accurately.
4. Consult us at PSA CPA:
   Your partners at PSA CPA are more than happy to provide professional advice that can ensure you’re fully prepared for these changes.

Why Accurate Tracking is Crucial

The IRS’s move to the Per-Wallet method underscores the importance of transparency and compliance in crypto tax reporting. By preparing now, investors can avoid potential headaches and ensure their tax filings align with the new regulations.