The IRS is introducing new rules for cryptocurrency sales and exchanges, which will impact both exchanges and taxpayers starting in 2025.
Form 1099-DA Requirement
- Beginning in 2025, cryptocurrency exchanges must issue Form 1099-DA to customers reporting cryptocurrency sales.
- Starting with the 2026 tax year, these forms will also include cost basis information.
While these requirements have no immediate impact on taxpayers, exchanges may begin asking customers about cryptocurrency holdings with a zero basis. These typically stem from transfers between wallets or accounts.
Wallet-Specific Cost Basis Rules
- Taxpayers must now report cost basis for cryptocurrency sales based on the specific wallet or account where the cryptocurrency was held.
- The universal wallet approach previously allowed is no longer permitted, making this a significant change for taxpayers.
To comply with this rule, action must be taken by December 31, 2024.
Safe Harbor Relief
Under Revenue Procedure 2024-28, the IRS provides Safe Harbor relief to help taxpayers allocate costs across wallets. Key steps include:
- Identifying the type and quantity of tokens in each wallet/account as of December 31, 2024.
- Determining the cost basis and acquisition dates, by token, of all unsold cryptocurrency as of that date.
Taxpayers can then allocate high-basis and low-basis units across wallets or accounts, provided the allocation is reasonable. This should be completed by December 31, 2024, but no later than the first trade in 2025.
Key Consideration for 2025 and Beyond
Taxpayers should ensure their cryptocurrency tracking software supports wallet-specific cost basis reporting to comply with these new requirements. Taxpayers should also notify their exchanges what method they will follow moving forward, Highest Cost/First Out (HIFO) or First In/First Out (FIFO). Specific identification methods like HIFO are still available, but the tokens must be identified prior to the sale. If specific identification is not selected prior to a sale, exchanges must default to FIFO.
