The new safe harbor allows taxpayers to reasonably allocate unused basis of digital assets to digital assets held within each wallet or account.

Beginning on January 1, 2025, taxpayers will no longer be able to utilize the universal method for determining tax basis for digital assets held in virtual wallets and accounts. Previously, the IRS permitted taxpayers to use the universal method for tracking tax basis in digital assets.

The universal method assumes all of a taxpayer's digital assets are held in one wallet or account, even if they are actually owned in multiple wallets or accounts. Upon sale of a digital asset, the taxpayer-owner could specifically identify the tax basis for the digital asset sold from the pool of digital assets. This would result in a remaining digital asset with used basis and an "orphaned" basis with no digital asset (i.e., a unit of unused basis). Thus, taxpayers who have been using the universal method for years may have a significant number of digital assets with no tax basis attached.

In 2024, the IRS issued critical guidance via Revenue Procedure 2024-28  to address the shift from prior practices—such as applying the first in, first out method universally or using multi-wallet approaches—to the updated rules requiring tax basis methods to be applied at a more granular level per wallet or per account. This transition is essential for taxpayers to ensure compliance when disposing of digital assets after January 1, 2025.

If you have used the universal method in the past, and have multiple wallets or accounts of digital assets, some of your wallets or accounts may have assets with little or no remaining tax basis, and other accounts with higher remaining basis. If you do nothing by December 31, and do not take advantage of the safe harbor, you run the risk of assets with disproportional basis across your accounts, which could ultimately result in large capital gains and taxes when sold.

Safe Harbor

Rev. Proc. 2024-28 grants relief to taxpayers who historically used the universal method and provides additional regulations governing the calculation and allocation of cost basis for digital asset transactions. The new safe harbor allows taxpayers to reasonably allocate unused basis of digital assets to digital assets held within each wallet or account. The safe harbor is only available to taxpayers who hold remaining digital asset units that they had either:

• Acquired or received in a transaction before January 1, 2025, or
• Held in the taxpayer’s wallet or account as of January 1, 2025.

The taxpayer is required to reasonably allocate the units based on either the following two methods:

1. The specific unit basis method, which identifies the date each digital asset was acquired and the cost of the digital asset on that date, or
2. The global basis method, which orders units of unused basis and then allocates the unused basis to a pool of remaining digital assets units within each wallet or account.

Whichever allocation method is chosen, the allocation is irrevocable and must be completed prior to January 1, 2025.

TAG’s Perspective

Taxpayers have a few options to simplify their administrative burden in preparing for the new tax basis rules:

1. Move all digital assets into one account before December 31;
2. Use crypto tax software to allocate unused tax basis;
3. Sell all digital assets by December 31 (and repurchase after January 1, if so desired); or
4. Elect to use a safe harbor under Rev. Proc. 2024-28 to make a reasonable allocation of digital asset units of unused tax basis to a wallet.

If electing the safe harbor allocation, it is crucial that proper detailed recordkeeping is kept as evidence of the units of unused basis within the taxpayer’s wallet or account in the event of an audit or a review. The reasonable allocation is required to be performed on an account-by-account or wallet-by-wallet basis. This transition is critical for taxpayers to ensure compliance is met when disposing of digital assets after January 1, 2025.

By taking one or more of the steps above before year-end, taxpayers can make recordkeeping and allocating cost basis much more administratively efficient and tax-favorable. Keep in mind that when it comes to different types of digital assets, the taxpayer is required to reasonably allocate a separate cost basis for each type of asset. For example, Bitcoin and Ethereum would require two separate cost basis allocations because they are considered different types of digital assets, even though both fall under the cryptocurrency category. 

For Further Information

If you would like more information about this topic or your own unique situation, please contact Thomas Mancuso, John I. Frederick, JD, LLM, or the Tax Accounting Group practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.