Universal accounting for digital assets concludes, but safe harbor available

The AICPA Digital Assets Tax Task Force (DAT TF) has been monitoring digital asset transaction reporting closely, and on the same day the final regulations on broker reporting (T.D. 10000) appeared, the IRS issued guidance that seems to have been overshadowed by the regulations, namely, Rev. Proc. 2024-28. Taxpayers, however, need to know about this critical safe-harbor guidance, as the Jan. 1, 2025, deadline to meet the safe harbor is fast approaching.

What is Rev. Proc. 2024-28?

Final regulations’ effect on the universal method for digital assets: Prior to finalizing the regulations on broker reporting, Treasury and the IRS permitted taxpayers to use — or at least they were not prohibited from using — the universal method for tracking 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 dispersed among multiple wallets or accounts. Upon sale of a digital asset, the account owner could specifically identify the 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 basis attached.

The final regulations, however, made clear that the IRS interpreted Sec. 1012(c)(1) as requiring regulations to be applied on a wallet-by-wallet method, which means that the universal method is no longer permissible.

Transition relief through the Rev. Proc. 2024-28 safe harbor: For taxpayers that used the universal method, Rev. Proc. 2024-28 allows for transition relief to the rules of Regs. Sec. 1.1012-1(j). The purported intention of the transition relief is to synchronize taxpayer records and broker records, so that brokers’ Forms 1099-DA, Digital Asset Proceeds From Broker Transactions, and taxpayers’ Forms 8949, Sales and Other Dispositions of Capital Assets, better align when brokers begin reporting basis on transactions occurring in 2026.

While some taxpayers purposefully used the universal method, other taxpayers may be using the method without knowing, as some crypto accounting software has defaulted to this method in the past. In either case, when determining a taxpayer’s cost basis, the universal method can create a mismatch where, as an example, an asset is sold out of Account A, but the taxpayer’s records for income tax reporting show basis was removed from Account B.

Taxpayers electing the safe harbor under Rev. Proc. 2024-28 may make a reasonable allocation of units of unused basis to a wallet, provided that the wallet holds the same number of remaining digital assets and the unused basis units are the same type of digital asset as the remaining digital assets. A reasonable allocation may be completed using either a specific unit allocation method or a global allocation method. A taxpayer uses (1) the specific unit allocation method by allocating units of unused basis to either a pool of remaining digital assets within a single account or specific units within a single account, or (2) the global allocation method by setting a rule for using the units of unused basis and allocating such units to a pool of remaining digital assets.

This one-time allocation is irrevocable, applies only to capital assets (i.e., both the unit of unused basis and the remaining unit must both be capital assets), and generally must be completed by Jan. 1, 2025. Furthermore, the taxpayer must maintain sufficient records identifying the total remaining digital assets in each account, the total units of unused basis, the original cost basis of each unit of unused basis, and the acquisition date of the digital asset to which the unused basis was originally attached.

Rev. Proc. 2024-28, however, leaves taxpayers and tax practitioners, or at least those taxpayers and tax practitioners who have even come across this little-known guidance, searching for additional clarity and guidance. Awareness, clarity, and guidance are the primary tenets of the comment letter regarding Rev. Proc. 2024-28 submitted by the AICPA’s Tax Executive Committee.

What can taxpayers do now to meet Rev. Proc. 2024-28’s requirements?

Despite the numerous unanswered questions stemming from Rev. Proc. 2024-28, taxpayers and tax practitioners alike must begin to act on this transition relief soon because the safe-harbor deadline, as it currently stands, is fast approaching and may remain regardless of whether the IRS provides additional clarity and guidance.

Ahead of Jan. 1, 2025, taxpayers can attempt to simplify the administrative burden for meeting the safe-harbor requirements by taking one or more of the following actions. (Note that these actions are not financial or investment advice but instead are suggestions to simplify the administrative burden of meeting the requirements of the safe harbor.)

Action 1: Move all digital assets into one account on or before Dec. 31, 2024. Moving all digital assets into one account could reduce the administrative burden of meeting the safe harbor because allocating remaining unused basis to one account is generally simpler than allocating it across many accounts. If a taxpayer takes this approach, the taxpayer should still make the necessary global or specific unit allocation before the safe-harbor due date, but the time spent performing that allocation will likely be reduced because there is only one account to reconcile.

Within the final regulations, custodial brokers are given the option to accept customer-provided cost-basis information. Custodial brokers are generally not required to report cost basis for digital assets acquired before Jan. 1, 2026. This allows for a transition year where taxpayers can provide cost-basis information to brokers, so that both taxpayer and broker records are consistent — hopefully, reducing the administrative burden of reconciling Forms 1099-DA to a taxpayer’s income tax return.

Taking this step could simplify the process of meeting the safe-harbor requirements, but taxpayers should still consider the concentration risk of holding digital assets in one account. After the safe harbor has been met, taxpayers could then redistribute assets into multiple accounts to mitigate the concentration risk in the future. Cost basis should be kept on a wallet-by-wallet method if assets are redistributed.

Action 2: Use crypto tax software. Some crypto tax software will allow taxpayers to generate an inventory report, which could be a way specifically to allocate unused basis in accordance with the safe harbor.

Before signing up, taxpayers might want to make sure the crypto tax software they use allows them to allocate their basis using a wallet-by-wallet method. In addition, taxpayers may also need to confirm that the software does not double-count previously used basis.

Software may be one way to automate parts of the unused basis allocation exercise. If taxpayers already have crypto tax software, consider whether the software offers the option to transition to wallet-by-wallet and what that process might look like. If the software does not offer the option to transition to wallet-by-wallet before Jan. 1, 2025, consider using different software.

Action 3: Sell all digital assets held by a custodian before Jan. 1, 2025. Taxpayers liquidating all of their digital assets before Jan. 1, 2025, would eliminate the need for allocating unused basis because there would no longer be any unused basis to allocate.

If holding digital assets still fits within the taxpayer’s financial and investment plans, they may consider repurchasing them on or after Jan. 1, 2025. Taxpayers may still have to keep complete and accurate records, though, because custodial brokers are not required to keep track of basis until Jan. 1, 2026.

Owning digital assets before Jan. 1, 2025, may create a complex tax administrative burden to meet the safe-harbor requirements. Selling all digital assets before that could reduce this burden. However, consider that taxpayers may trigger realized gains or losses if they liquidate their holdings. If the intent is to repurchase with the same lot, taxpayers with realized gains may have to set aside some of the proceeds to pay tax on the realized gain. Taxpayers with realized losses may need to consider the wash-sale rules or economic substance doctrine for disallowing realized losses if they intend to repurchase their assets shortly after liquidation.

Action 4: Leave holdings as they are and allocate unused basis according to Rev. Proc. 2024-28 to meet the safe-harbor requirements.

What guidance and clarification should the IRS provide regarding Rev. Proc. 2024-28?

While taxpayers and tax practitioners are acting to meet the safe-harbor deadline, it is hoped that the IRS provides additional clarity and guidance on numerous issues. For example, Rev. Proc. 2024-28 offers a safe harbor by allowing taxpayers to allocate unused basis, but it offers no consequence to not electing into the safe harbor. Rather, Rev. Proc. 2024-28 merely provides that the actions of taxpayers who make a reasonable allocation but fail to satisfy the requirements of Rev. Proc. 2024-28 “may result in the assessment of additional tax, penalties, and interest.”

A few other key lingering issues are as follows:

• Taxpayers need to know how to substantiate the reasonable allocation to prove such allocation was made, whether to tax practitioners, brokers, or the IRS. Because many taxpayers use third-party software to track digital asset transactions, the IRS should consider addressing whether documentation generated from such providers is sufficient to satisfy and substantiate the safe harbor.
• With the new digital asset reporting regulations and the transition to a uniform reporting method, there will likely be discrepancies between many Forms 1099-DA issued by brokers and taxpayers’ Forms 8949. One suggestion in the AICPA’s comment letter is to provide a code for Form 8949, Part 1, column (f), for taxpayers to indicate that they have satisfied the safe harbor, and, therefore, the basis reported on Form 1099-DA and Form 8949 may not match.
• The transition relief pursuant to Rev. Proc. 2024-28 requires collaboration between brokers and taxpayers; however, Rev. Proc. 2024-28 focuses solely on the taxpayer’s burden in making a reasonable allocation. Additional guidance describing the broker’s role would be helpful since the taxpayer will largely be relying upon brokers to accept taxpayer-provided basis information.
• If the intention of this safe harbor is to synchronize taxpayer and broker records for taxpayers that used the universal method, then taxpayers who used any basis tracking method that differed from their brokers’ should also be eligible for this relief. For example, if a taxpayer used first-in, first-out (FIFO) but the broker’s software only offered highest-in, first-out (HIFO), the taxpayer should be permitted to take advantage of the safe harbor to synchronize their records with the broker’s.

In addition to the outstanding ambiguities, there appears to be a general lack of awareness regarding this transition relief. The AICPA has advocated enhanced awareness to avoid confusion and complications that may arise if taxpayers have not elected the safe-harbor rules under Rev. Proc. 2024-28 by Jan. 1, 2025. As many taxpayers tend to delay tax issues until tax filing season, tax practitioners can imagine the potential chaos involving taxpayers who may not have even known that universal accounting for digital assets was no longer permitted.

Although, technically, there is additional time for taxpayers to make the safe-harbor election if they use specific unit allocation and do not engage in any digital asset transactions, an extension of time with fewer conditions to satisfy the safe harbor would be a very welcome form of relief.

Ultimately, tax practitioners need to know about the transition relief offered by Rev. Proc. 2024-28, so that they can inform their clients soon, especially considering the heavy burden that the safe harbor shifts to the taxpayer. Despite the lingering questions, tax practitioners and their clients alike need to at least start planning for this impending deadline.

— Nik Fahrer, CPA, is director and blockchain and digital assets practice leader with Forvis Mazars US in Colorado Springs, Colo., and Daniel A. Hauffe, J.D., is senior manager–AICPA Tax Policy & Advocacy. Fahrer is a member of, and Hauffe is staff liaison to, the AICPA Digital Assets Tax Task Force. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.