IRS Revenue Procedure Crypto: Expert Guide
The IRS released guidance that will impact crypto investors in 2025 - but IRS bulletins aren't always easy to digest. Learn more in our IRS Rev. Proc. guide.
What is IRS Revenue Procedure 2024-23?
Rev. Proc. 2024-23 is part of the IRS's continuous updates to taxation procedures, but it primarily addresses general accounting method changes for businesses, not crypto assets directly. This release provides taxpayers with guidance on the automatic consent process to change certain accounting methods without needing prior IRS approval. This is standard in IRS updates, where various industries are provided clarifications on tax treatment.
Meanwhile, Rev. Proc. 2024-28, specifically addresses digital asset cost basis tracking. The release introduces new rules starting in 2025 where brokers must issue Form 1099-DA, (theoretically) making it easier for taxpayers to report crypto gains and losses.
Read next: What is Form 1099-DA?
What is IRS Revenue Procedure 2024-28?
Rev. Proc. 2024-28 outlines safe harbor provisions for allocating the cost basis of digital assets across wallets and accounts before the January 1, 2025 deadline. These updates are crucial as they change how taxpayers will track and report digital asset transactions, requiring accurate record-keeping and basis allocation per wallet.
For crypto tax software and investors, the IRS’s push toward stricter cost basis tracking means that software tools must evolve to handle allocations by wallet rather than treating holdings as a unified pool.
Key changes from Rev. Proc. 2024-28:
Form 1099-DA: The draft of this form aims to streamline the reporting of digital asset transactions by brokers. This reporting will be required starting in 2025 for transactions that occur after 2024. The form covers information on gross proceeds from sales, similar to traditional 1099 forms for securities, but specifically designed for crypto. We have dedicated guides on both Form 1099-DA and previous crypto 1099 forms.
Cost basis tracking and allocation: One of the most significant challenges for crypto investors is the calculation and reporting of the cost basis—the original value of the digital asset for tax purposes. The IRS is now requiring stricter tracking of this cost basis for crypto assets. The recent guidance, notably Rev. Proc. 2024-28, introduces a safe harbor for allocating unused basis in digital assets, which becomes effective starting January 1, 2025. The safe harbor allows taxpayers to allocate unused basis to digital assets they hold at that time, provided they meet specific record-keeping requirements.
Read next: USA Crypto Tax Guide
What does it mean for crypto investors and businesses?
Broker responsibilities: Starting in 2025, brokers must provide taxpayers with Form 1099-DA, reporting transaction details like cost basis and proceeds from sales. This form is crucial because it will reduce discrepancies between what the IRS knows about a taxpayer's transactions and what the taxpayer reports, helping avoid penalties or audits. Investors in theory will start receiving these in 2026, but some exchanges - like Coinbase - are already asking for more time to put processes in place to achieve this.
Investors' cost basis obligations: Investors must ensure they track their acquisition costs and dates of digital assets accurately. Rev. Proc. 2024-28 introduces rules for basis allocation, which allows taxpayers to allocate basis between different units of digital assets held in their accounts before 2025. This can help investors accurately report gains or losses when they sell or trade their assets in future years. Importantly, once an allocation is made under the safe harbor, it is irrevocable.
Overall, the IRS's push for stricter crypto tax compliance is intended to streamline reporting and improve accuracy, but it also places new burdens on both brokers and investors to ensure they are keeping detailed and accurate records of all digital asset transactions.
What do investors need to do about cost basis tracking?
In brief, if you were previously using a generic method like FIFO in your crypto tax software with wallet-based cost tracking off, then you’ll now be required to use the wallet based cost tracking, effective January 1, 2025.
This means you’ll need to allocate your cost basis across your wallets for each asset and use the wallet-based cost tracking method moving forward.
Of course, this raises questions about how you should allocate cost basis across your assets going forward - and a lot of this is going to depend on how your crypto tax software handles it and the flexibility of your software.
Read next: What is Cost Basis?
How to handle 2025 IRS cost basis changes in Koinly
We’re working on updates to our software that will allow users to migrate from one setting to another. We’ll be releasing more information and a help guide in due course once the update is live.
