If you own digital assets, 2025 is shaping up to be a pivotal year for crypto taxes. Major shifts in IRS rules mean you’ll need to rethink how you track and report your digital asset transactions. Let’s break down the key changes and what you need to do to stay compliant.

End of Universal Accounting: Wallet-by-Wallet Rules

Starting January 1, 2025, the IRS will require wallet-by-wallet accounting for crypto transactions. This means you must track gains and losses separately for each wallet or exchange, instead of pooling cost bases across all platforms.

For example, if you bought XRP on Uphold, you can only use that cost basis when selling XRP on Uphold. Transfers between wallets will no longer allow for cost basis aggregation, adding significant complexity to crypto tax reporting.

The Safe Harbor Plan: Your Compliance Solution

To ease the transition, the IRS has introduced a Safe Harbor Plan. This plan lets you shift from universal accounting to wallet-by-wallet accounting while staying compliant. Here’s what you need to know:

• Deadline: The plan must be signed and dated before January 1, 2025.

• Steps to Set Up:

  1. Download the required form.

  2. Choose your preferred allocation method (e.g., highest-cost allocation).

  3. Sign and date the form, and save it for your records.

Failing to establish a Safe Harbor Plan could result in audits, penalties, and the need to amend past returns under wallet-by-wallet rules.

Mandatory FIFO Accounting

First In, First Out (FIFO) will become the default accounting method for crypto sales in 2025. Unless you specify otherwise before a transaction, the IRS will assume you’re selling your oldest assets first.

FIFO can lead to higher taxes if your oldest assets have the lowest cost basis. However, the Safe Harbor Plan can help minimize your tax burden by allowing you to allocate higher-cost assets as the oldest lots.

Introducing Form 1099-DA

Starting in 2025, crypto exchanges will issue Form 1099-DA to report transaction proceeds to the IRS. While this form will list sale prices, it won’t include cost bases. If your cost basis isn’t properly reported, the IRS will assume it’s $0, potentially inflating your taxable income.

For example, if you sell Bitcoin for $100,000 but fail to report the $90,000 cost basis, the IRS will treat it as a $100,000 gain, resulting in significantly higher taxes.

Action Steps to Prepare

Here’s how to get ahead of these changes:

1. Reconcile Past Transactions: Ensure all your crypto transaction records are accurate and complete.

2. Clarify Cost Basis: Track your cost basis for each wallet and exchange to avoid overpaying taxes.

3. Set Up a Safe Harbor Plan: Protect yourself from compliance issues by transitioning to wallet-by-wallet accounting.

Need Help?

If you’re unsure where to start or need professional assistance, feel free to reach out. We can connect you with experienced advisors who specialize in crypto taxes and compliance. Send us an email at https://www.digitalfamilyoffice.io and let us know.

Don’t wait until it’s too late—start preparing now to ensure a smooth transition and avoid costly surprises in 2025.