Reporting crypto on taxes: big changes for 2025
The IRS has your Bitcoin on their radar - get prepared before the grace period ends on December 31st! There are some big changes on the brink when it comes to how you report Bitcoin on your taxes. This blog presents a summary of what you need to know about changes in Bitcoin (and other digital asset) income tax reporting for 2025.
Before we get started, let’s make it clear: we aren’t CPAs or tax advisors. We are a wealth management firm in California. What we’re about to say should not be construed as financial, legal, or tax advice specific to any one individual; for such advice, talk to your CPA.
How digital assets have historically been held
But first, a bit of background on how cryptocurrency assets like Bitcoin are held, because it has a big impact on how they are reported to the IRS.
Digital assets can be held in dozens of places like a hardware (offline) wallet from Ledger, an (online) wallet from Trust Wallet, or a Coinbase custodied wallet. Tracking an investor’s wallets and various transactions can be aided by software from various providers like CoinLedger or Turbo Tax. These tools are useful because it can get very complicated for active investors to keep track of all this information (Pepi, 2024 and Erb, 2024).
There may be reasons why a crypto investor could have accumulated dozens of wallets since they got started. But after the IRS and US Treasury updated regulations on digital asset information requirements in the summer of 2024, it is time to reconsider if that still makes sense.
Note: If you only have digital asset exposure through a Bitcoin ETF (Exchange Traded Fund) or Investment Trust, this post does not apply to you because the cost basis information is already tracked and reported to the IRS on registered securities like these.
No more cherry picking of Bitcoin capital gains!
Taxpayers have already been subject to taxes when selling or exchanging digital assets, but what’s changed is the IRS will soon be getting reports directly from brokers (and other digital asset service providers), just like they do for mutual fund and stock sales. For 10 years, the IRS has taken the perspective that digital assets are considered “property” for tax purposes – so taxpayers must track their cost basis (original purchase cost) and recognize a gain or loss whenever there is a sale. (Cohen, 2024)
About five years ago, the IRS clarified that taxpayers may pick and choose amongst all their crypto accounts and wallets to determine their cost basis of digital assets. If a matching purchase was not specifically identified, FIFO (first-in, first-out) accounting must be used. This has been referred to as a “universal wallet” or “global wallet.” If you sold a digital asset, you could cherry pick the cost basis to minimize the tax impact (RSM, 2024).
It's all about to change!
Beginning in 2025, brokers are going to start reporting and issuing Form 1099-DA for digital asset investors and users. Centralized exchanges and payment processors are required to start reporting 1/1/25, with non-custodial and decentralized brokers to start later (Daftary et al., n.d., and KPMG, 2024).
This has several important points of impact for Bitcoin holders, according to recent guidance from the AICPA & CIMA, and RSM:
Instead of being able to allocate across all your wallets, you may be stuck doing tax basis accounting work for each and every wallet.
Your accounting books and records may not reconcile with what the hosted wallet provider is sending the IRS – which could mean even more accounting headaches for you and your tax preparer.
This could put Bitcoin, Ether, and other digital asset holders in quite the pickle. There are now going to be two accepted methods of tracking the cost basis of your digital assets, and there will be distinct pros and cons to each depending on your circumstances.
We highly encourage anyone who owns digital assets to work with their CPA or tax preparer to decide what course of action to take. Remember to take copious notes and memorialize this decision before 12/31/24 so you have proof!
Wrapping it up
We are financial advisors in La Jolla, California, serving local clientele as well as folks across the country. Some of our clients own Bitcoin and other cryptocurrency through their wallets, but many others don’t - and while it’s not something we usually advise on, we believe many consequential choices like this one are often overlooked before it’s too late. If you want to discuss your overall financial plan or retiring in California or other locations, please reach out to us and set up a time to talk.
Chris Jaccard, CFP®, CFA is a lead advisor with Financial Alternatives in La Jolla, CA. When he’s not working on home improvement projects or trying to keep up with his kids, he loves to help successful families consider their alternatives and make better financial choices with the EXPERT™ Advisory Process. Schedule a time to chat about your situation or the latest project.
Sources
AICPA & CIMA. (2024, October 3rd.) Demystifying IRS guidance on digital assets. https://aicpa.net.libsyn.com/website/show/taxodyssey/demystifying-irs-guidance-on-digital-assets
Daftary, Cyrus, Chou, Lani, Garlett, Philip, and Suit, Nelson. KPMG. Tax IRW Ops Insights Quick Tips & Updates. irw-tax-ops-quick-tips.pdf
Erb, Kelly Phillips. 2024, July 23rd. Forbes. The Sky Isn’t Falling After IRS Finalizes Crypto Tax Reporting Rules. https://www.forbes.com/sites/kellyphillipserb/2024/07/23/the-sky-isnt-falling-after-irs-finalizes-crypto-tax-reporting-rules/
KPMG. (2024, June 28th). Information reporting, determination of amount realized and basis, and backup withholding for digital asset transactions. https://kpmg.com/us/en/taxnewsflash/news/2024/06/tnf-final-regulations-information-reporting-determination-of-amount-realized-and-basis-and-backup-withholding-for-digital-asset-transactions.html
Pedersen, Cynthia. (2024, October 15th). Cohen & Co. Rev. Proc. 2024-28 Safe Harbor Means Year-End Planning for Digital Asset Users | Cohen & Company. https://www.cohencpa.com/knowledge-center/insights/october-2024/rev-proc-2024-28-safe-harbor-means-year-end-planning-for-digital-asset-users
Pepi, Kane. (2024, September 24th). Techopedia. 8 Best Crypto Tax Software to Use in October 2024. https://www.techopedia.com/cryptocurrency/best-crypto-tax-software
RSM. (2024, August 13th). The end of universal wallet accounting; Rev. Proc. 2024-28 safe harbor relief. https://rsmus.com/insights/tax-alerts/2024/end-universal-wallet-rev-proc-2024-28-safe-harbor-relief.html