Crypto investors celebrating the recent surge in digital currencies are soon to face some complex tax reporting challenges in the upcoming year. With new accounting regulations for cryptocurrency set to kick in on January 1st, the way investors report transactions and holdings of digital assets like Bitcoin might change dramatically.
“This marks the most significant shift in crypto tax guidance since 2014, when the IRS categorized crypto as property instead of currency,” explained Andrew Gordon, a tax attorney and CPA at Gordon Law Group. The reason behind this is the introduction of a new tax form, 1099-DA, which mandates crypto brokers to report investors’ sales proceeds from digital assets starting in 2025. Moreover, there will be adjustments to how cost basis calculations are handled—crucial for investors since cost basis reflects the initial investment in an asset. Without proper tracking of crypto cost basis, investors might have to set it to zero, leading to substantial capital gains taxes upon selling their assets. This is particularly important now, as Bitcoin has soared to $100,000, posing potentially heavy tax burdens for early adopters with minimal initial investments.
While the new rule offers some standardization for brokers and exchanges in reporting, it presents a complicated scenario for individual investors who often distribute their crypto holdings across multiple wallets. Historically, investors have relied on a “universal” method to track their crypto cost basis, treating their assets as if they were within a single account, even if spread across different wallets or exchanges. They also used to allocate their basis at the point of sale. Starting January 1st, this universal method will no longer be permissible, requiring investors to make a “reasonable allocation” of their cost basis for each wallet and diligently track it as well.
“It’s common to move crypto around, but this new form will make cost basis tracking a challenge,” noted Gordon, indicating that each exchange will now report on a per-wallet level using the 1099-DAs.
As the year ends, there are several proactive steps investors can take to gear up for this fresh accounting landscape. Firstly, they should either consult an accountant or employ planning software to comprehensively review their trades and pinpoint gains and losses in each wallet. “Imagine the hassle of gathering every transaction from all your wallets, but contact your CPA to give them a heads-up about this incoming data,” advised Tyrone Ross, CEO of Turnqey Labs, a platform offering crypto asset data aggregation.
Investors should also collaborate with their accountants to figure out a “reasonable allocation” of their cost basis, using distinct methods like global or specific unit allocation. Each method carries unique planning opportunities, according to Gordon. Global allocation applies the basis across all remaining crypto assets under a defined rule, while specific unit allocation deals with assets held in a single account. In specific unit allocation, investors might isolate low-cost basis crypto in a separate wallet, intending to hand it down to heirs—advantageous because inherited property gets a basis adjustment to the current market value, reducing capital gains taxes if sold. Conversely, higher-cost basis crypto used for trading could be stored in a separate wallet.
The global allocation method offers a more straightforward approach. Investors can consolidate their holdings into one wallet by year’s end and continue using this method looking forward. For those who can’t adjust their crypto in time, at a bare minimum, they should at least coordinate with their tax professional to create a document specifying their chosen allocation method, Gordon recommended.
“Now is the time to organize and get ready for the looming tax reporting,” Ross emphasized.
