The IRS has introduced new guidance for cryptocurrency taxpayers under Revenue Procedure 2024-28, offering a critical safe harbor for those transitioning to the updated digital asset accounting rules effective January 1, 2025. These instructions are designed to help you comply with the requirements, avoid potential audit risks, and ensure your crypto tax reporting remains accurate and defensible.
This guide breaks down the essential steps you must take before January 1, 2025, based on our interpretation of the IRS guidance. While some aspects of Rev Proc 2024-28 remain ambiguous—prompting the AICPA to request clarification—the compliance deadline is fast approaching. To protect your tax position, it's vital to act now.
Step 1: Understand the New IRS Guidance
Before diving into compliance actions, it’s important to understand the shift in accounting methodology. Starting in 2025, taxpayers must use wallet-by-wallet accounting under §1.1012-1(j), moving away from the previous universal (pooled) cost basis approach. This means each wallet or exchange account will be treated as a separate inventory for tax purposes, and First-In, First-Out (FIFO) will become the default accounting method unless specific identification is properly documented in advance.
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To get a clear overview of these changes, consider watching an explanatory video that breaks down the new cryptocurrency tax guidance. While not mandatory, visual learning can significantly improve understanding of complex regulatory updates.
Step 2: Capture Year-End Digital Asset Balances
One of the core requirements under Section 4.02(4) of Rev Proc 2024-28 is maintaining verifiable records of your digital asset holdings as of December 31, 2024, or immediately after your final transaction of the year.
You must:
- Identify all wallets and exchanges holding tokens.
Take screenshots of each platform showing:
- Token balances
- Wallet or account addresses
- Date and time stamp (critical for verification)
- Save these screenshots securely, either in a dedicated folder or compiled into a single PDF.
- Label each file clearly by platform name and include wallet addresses where possible.
- Keep a personal copy and share one with your tax preparer when beginning your 2024 tax engagement.
Note: While crypto tax tools like Koinly, CoinTracking, or CoinTracker generate closing reports, the IRS may not accept them as standalone proof. Direct screenshots from exchanges and self-custody wallets are strongly recommended for audit readiness.
This snapshot serves as the foundation for your pre-2025 cost basis allocation and ensures you meet the safe harbor’s documentation standards.
Step 3: Choose a Global Allocation Method
The transition to wallet-by-wallet accounting requires a strategic decision: how to allocate your pre-2025 cost basis across your various wallets. The IRS allows flexibility here, but your choice will impact future capital gains and tax liability.
You must select one of the following global allocation methods:
Option 1: Highest Cost Allocated First
This method assigns your highest-cost lots to hosted wallets (e.g., Coinbase, Binance) first, followed by unhosted wallets (e.g., MetaMask, Ledger), ordered by acquisition date (oldest to newest).
- Effect: Minimizes taxable gains early in 2025 by using high-basis units first.
- Best for: Taxpayers seeking to defer gains and accelerate losses.
Option 2: Lowest Cost Allocated First
Assigns the lowest-cost units first to hosted wallets, then unhosted ones.
- Effect: Triggers higher gains sooner but preserves lower-basis units for later.
- Best for: Those expecting higher tax brackets in future years or planning large future sales.
Option 3: Oldest Allocated First
Allocates assets based on purchase date—earliest purchases go first to hosted wallets.
- Effect: Accelerates long-term capital gains (taxed at lower rates).
- Best for: Long-term holders aiming to maximize preferential tax treatment.
By default, allocation applies to hosted wallets first, assuming they’re more active. However, if you prefer applying the method to unhosted wallets first, indicate this on your Digital Asset Allocation Plan.
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Recommended Approach: We generally advise using Highest Cost Allocated First to defer tax liability. However, individual circumstances—such as net capital loss carryforwards or income projections—may justify another method.
You may apply different methods per asset type (e.g., use Highest Cost for BTC and Oldest for ETH), but for simplicity and audit safety, we recommend one consistent method across all digital assets.
Step 4: Document Your Allocation Plan
Once you’ve selected your allocation method, formalize it using the Digital Asset Allocation Plan form:
- Clearly state your chosen method on page one.
- Sign and date the document before January 1, 2025.
- Retain a copy for your records.
- Provide a copy to your tax preparer.
This document does not need to be filed with the IRS—but it must be produced during an audit. Failure to maintain it could disqualify you from safe harbor protections.
While Rev Proc 2024-28 also permits specific identification accounting post-2025, this requires documenting the exact lot sold before executing the transaction. Unlike in prior years, you won’t be able to retroactively test multiple methods. FIFO will apply by default unless pre-designated.
Specific identification is complex and labor-intensive. We recommend it only for large, high-impact transactions where precise lot selection offers material tax savings.
Frequently Asked Questions (FAQ)
Q: What happens if I miss the January 1, 2025 deadline?
A: Missing the deadline may disqualify you from the safe harbor, increasing audit risk and potentially leading to disputes over cost basis calculations. Act now to ensure compliance.
Q: Do these rules apply to NFTs?
A: No. NFTs are treated as unique assets, so their cost basis is determined individually per transaction. The wallet-by-wallet rule does not apply.
Q: Can I change my allocation method after 2025?
A: Changing methods may require IRS approval via Form 3115. It’s best to choose wisely now and maintain consistency.
Q: Are screenshots from tax software enough?
A: Not necessarily. The IRS may require direct platform evidence. Always supplement software reports with official screenshots.
Q: What qualifies as a “hosted” vs. “unhosted” wallet?
A: Hosted wallets are third-party platforms like exchanges (e.g., Kraken). Unhosted wallets are self-custodied (e.g., hardware or mobile wallets).
Q: Why is FIFO now the default?
A: The IRS mandates FIFO under §1.1012-1(j) unless specific identification is documented in real time. This reduces ambiguity and prevents manipulation.
Final Reminders
Time is running out. To qualify for the IRS safe harbor under Rev Proc 2024-28:
- ✅ Capture year-end balances with dated screenshots
- ✅ Select and document your global allocation method
- ✅ Sign and date your plan before January 1, 2025
These steps aren’t just administrative—they’re essential safeguards in an evolving regulatory landscape.
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By acting now, you ensure smoother tax filings, reduce audit exposure, and position yourself for long-term compliance under the new framework.
Core Keywords: cryptocurrency tax compliance, IRS safe harbor 2025, digital asset allocation, cost basis accounting, wallet-by-wallet accounting, FIFO crypto taxation, Rev Proc 2024-28