Navigating the New IRS Guidance on Allocating Basis in Digital Assets

As the landscape of digital assets continues to evolve, the IRS is increasingly clarifying how existing tax principles apply to digital assets like cryptocurrency. For taxpayers dealing with digital assets, understanding how to properly allocate basis in these assets is crucial for accurate tax reporting and maximizing deductions. At 9FIFTEEN Accountants, we are tax experts who can help you navigate these complex rules, ensuring you remain compliant while optimizing your tax strategy.

The IRS’s Latest Guidance: What You Need to Know

In Revenue Procedure 2024-28, the IRS provides crucial guidance for taxpayers on how to allocate the basis of digital assets within their wallets or accounts. This new procedure is especially important as it sets a safe harbor under Section 1012(c)(1) of the Internal Revenue Code, allowing taxpayers to allocate unused basis of digital assets to those held in each wallet or account as of January 1, 2025.

This guidance is particularly relevant for taxpayers who have been using digital assets, such as cryptocurrency, as capital assets. The IRS has been clear that existing tax principles apply to virtual currencies, but the specific rules for determining and reporting the basis of these assets have been evolving.

Background: IRS Virtual Currency FAQs and the FIFO Rule

Since October 9, 2019, the IRS has provided Virtual Currency FAQs that outline how taxpayers should apply tax principles to virtual currencies. Key points from these FAQs include:

• Specific Identification: Taxpayers can choose the specific units of virtual currency that are sold, exchanged, or otherwise disposed of if they can specifically identify these units and substantiate their basis. This involves detailed records showing the acquisition date, cost basis, fair market value at acquisition, and the sale or disposal date.
• FIFO Rule: If a taxpayer cannot or does not specifically identify the units of virtual currency, the IRS requires that the units be sold or disposed of on a First In, First Out (FIFO) basis. This means the earliest acquired units are considered sold first.

The new guidance, effective January 1, 2025, further refines these principles by requiring basis determination on an account-by-account basis for digital assets. This is a significant change for taxpayers who previously may have used a universal or multi-wallet approach to basis allocation.

The Infrastructure Investment and Jobs Act and Its Impact

The Infrastructure Investment and Jobs Act, passed in 2021, expanded the definition of specified securities to include digital assets. This change made digital assets subject to the same basis allocation rules that apply to other specified securities, such as stocks and bonds.

The IRS’s proposed regulations, published in August 2023, clarified these requirements, particularly emphasizing the need for basis determination on an account-by-account basis. These regulations also introduced specific requirements for identifying units of digital assets that are sold or disposed of, whether they are held in the custody of a broker or in an unhosted wallet.

Key Changes Introduced in the 2024 Final Regulations

On June 28, 2024, the IRS finalized these regulations, incorporating feedback from public comments. The final regulations maintain the account-by-account basis requirement but offer some modifications to ease the transition for taxpayers.

One of the main issues raised by taxpayers was the potential discrepancies between their basis records and the basis reported by brokers on Forms 1099-DA. The IRS addressed these concerns by allowing a safe harbor for taxpayers who have been using a multi-wallet approach, giving them time to adjust their basis tracking methods to comply with the new rules.

Practical Implications for Taxpayers

For taxpayers, these changes mean that starting January 1, 2025, they must be meticulous in tracking the basis of digital assets on an account-by-account basis. Here’s what you need to do:

• Organize Your Records: Ensure that you have detailed records for each digital asset, including the acquisition date, purchase price, and any relevant identifiers.
• Identify Units Properly: If you sell or dispose of digital assets, you must be able to specifically identify the units involved in the transaction or default to the FIFO method.
• Adjust Your Basis Tracking: If you have been using a universal or multi-wallet approach, now is the time to adjust your tracking systems to ensure compliance with the new IRS rules.
• Work with a Tax Professional: Given the complexity of these regulations, it is advisable to work with a tax professional who can help you navigate the rules and ensure that your basis is correctly allocated.
  
  

How 9FIFTEEN Accountants Can Help

At 9FIFTEEN Accountants, we are experts in tax laws and regulations, including the latest IRS guidance on digital assets. We can help you understand these new rules and adjust your tax strategy accordingly. Whether you need help with basis tracking, specific identification of digital assets, or ensuring that you are maximizing your deductions, we are here to assist.

Ready to optimize your tax strategy and ensure compliance? Schedule a call with us today to discuss how we can help you navigate these complex rules and maximize your deductions.

By understanding and applying the IRS’s guidance on digital assets, you can significantly enhance your tax strategy and compliance. Let 9FIFTEEN Accountants guide you through the process, ensuring your finances are managed with precision and expertise.

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