Revenue Procedure 2024-28 Digital Asset Cost Basis
Final regulations were recently issued regarding the determination of cost basis for digital assets (cryptocurrencies, NFTs, etc.) effective January 1, 2025. The final regulations apply on a wallet-by-wallet basis.
There is a safe harbor for transition with Revenue Procedure 2024-28. This allows taxpayers to make a reasonable allocation of unused basis to a wallet, provided that the wallet holds the same number of remaining digital assets and the unused basis units are the same type of digital asset as the remaining digital assets. A reasonable allocation may be completed using either a specific unit allocation method or a global allocation method.
A taxpayer uses (1) the specific unit allocation method by allocating units of unused basis to either a pool of remaining digital assets within a single account or specific units within a single account, or (2) the global allocation method by setting a rule for using the units of unused basis and allocating such units to a pool of remaining digital assets.
This one-time allocation is irrevocable and must be completed by January 1, 2025. The taxpayer 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.
Taxpayers may attempt to simplify the administrative burden for meeting the safe harbor by taking one or more of the following actions. Please note that these actions are not financial or investment advice but are suggestions to simplify the administrative burden of meeting the requirements of the safe harbor.
Action 1: Move all digital assets into one account on or before December 31, 2024. Allocating unused basis to one account should be simpler than allocating across multiple accounts. The taxpayer must still make the necessary global or specific unit allocation before the safe harbor due date.
Action 2: Use crypto tax software. Some software allows taxpayers to generate an inventory report, which could be a way specifically to allocate unused basis in accordance with the safe harbor. Please ensure your software allows for wallet-by-wallet allocation and that it does not double count previously used basis.
Action 3: Sell all digital assets held by a custodian before January 1, 2025. Be aware of the wash sale rules should there be a loss on sale. This will eliminate the need for allocating unused basis as there will no longer be unused basis to allocate.
Action 4: Leave holdings as they are and allocate unused basis according to Revenue Procedure 2024-28 to meet the safe harbor requirements.
Beginning January 1, 2026, brokers will be required to report digital asset sales on Form 1099-DA. Because of this, your broker may not report basis until the required. You will need to keep complete and accurate records of your digital asset transactions during calendar year 2025. Due to the transition relief of this Revenue Procedure, there could be discrepancies in basis reported on Form 1099-DA and the allocations that taxpayers have utilized.
Caution: This explanation is general in nature and should not be used for specific planning. Contact a tax professional for your specific planning needs.