If you or your family members hold crypto assets, there's a critical change coming up that you may want to act on by December 31, 2024. Let's break down what's changing and what you need to do, if you want to qualify for safe harbor protections related to the basis of your crypto assets. Basis is relevant because when you sell your crypto assets, you will pay capital gains tax on the difference between your “basis” or the cost at which you purchased, and the sale price, or the price at which you sell your assets.
In the past, tracking basis for purposes of reporting gain on the sale of crypto assets was able to be combined across all tokens and all wallets. As a result, whether you bought or sold crypto in any one wallet or exchange, you could use first-in/first-out (FIFO), last-in/first-out (LIFO), Highest Cost First Out (HCFO) or other capital gains reporting methods across all of your crypto assets. Starting in the 2025 tax year, that will no longer be the case, and you must track each wallet’s cost basis separately.
Example of the Impact of New Crypto Basis Rules
Here's a practical example of how this change impacts you:
Let's say you bought 2 Bitcoin on Kraken at $50,000 each, and also purchased 2 Bitcoin on Coinbase at $5,000 each, and have held all of it until now (smart thinking). Under 2024 and prior basis rules, if you sold your Bitcoin on Coinbase, you could choose to apply the higher cost basis from your Kraken purchase to minimize your capital gains — a strategy known as Highest Cost First Out (HCFO). However, starting in 2025, you wouldn’t be able to use HCFO or FIFO across wallets. Each exchange account and crypto wallet address will be treated as a separate account with its own isolated cost basis.
The IRS is providing a one-time "safe harbor" until December 31, 2024, allowing investors to choose how to allocate their cost basis across accounts. Missing this deadline could significantly impact your ability to manage your crypto tax strategy effectively.
To read Rev Proc 2024-28, do so here: https://www.irs.gov/pub/irs-drop/rp-24-28.pdf
4 Options For How to Handle the Change in the Basis Rules
This is not financial or investment advice, and you may want to seek individual advice. These are the 4 actions we’ve identified you may want to consider:
Consolidate Accounts by Dec. 31, 2024: Merge all digital assets into one account to simplify safe-harbor compliance. Allocate unused basis globally or per unit before the due date, as per the safe harbor options provided below. After meeting the safe harbor, assets can be redistributed to reduce concentration risk, maintaining assets on a wallet-by-wallet basis.
Use Crypto Tax Software: Use software that supports wallet-by-wallet basis allocation and avoids double-counting. Evaluate existing tools and transition to suitable software before Jan. 1, 2025, if necessary. The challenge here is going to be that you may not have documented basis information to feed into your crypto tax software.
Sell Assets Before 2025: Liquidate digital assets by Jan. 1, 2025, apply all unused basis, pay your taxes, and start over. Consider tax implications like gains, losses, and wash-sale rules if planning to repurchase.
Retain Holdings and Allocate Unused Basis: Keep digital assets as-is and use Rev. Proc. 2024-28 to allocate unused basis for safe-harbor compliance.
According to Laura Walter, at CryptoTaxGirl.com, you can sign and date a digital asset allocation plan document, available on the CryptoTaxGirl website before January 1, 2025. Signing that document will require you to choose a basis allocation method to allocate your basis across crypto assets held before January 1, 2025. Talk to your CPA about which basis allocation method to choose, after your 2024 transactions have been reconciled, and then you can fill in the blank. Laura recommends “When in doubt, apply the Highest Cost Allocated First method to your Digital Asset Allocation Plan.”
IRS guidance provides two methods for allocating your cost basis:
Specific Unit Allocation: This method allows you to choose which cost basis goes to which wallet or account. Think of it like organizing your physical assets — you get to decide which items go in which boxes. You must complete this allocation before your first crypto transaction in 2025 or your tax return due date, whichever comes first.
Global Allocation: This approach uses a predetermined rule to allocate your cost basis across accounts. For example, you might allocate the highest cost basis units first, followed by the lowest. You must document your chosen rule before January 1, 2025, and complete the allocation by your 2025 tax return due date.
If you have a complex situation, talk with your CPA or other tax professional, ideally before year end.
Why This Matters for Your Legacy Planning
We need to know what you own, where it is, and how to help your heirs find it. If we aren’t aware of your crypto holdings, and cannot help your heirs get access to your keys, it’s very likely that your crypto could be lost forever. One good thing about death is that under current law, when you die, regardless of the basis allocation method you’ve chosen, your heirs will get a “step up in basis” meaning that they can sell your crypto without paying any capital gains other than the growth in value after your date of death.
Steps to Take Now
Create an inventory of all your crypto holdings across different wallets and exchanges.
Gather records of when you purchased your crypto assets and at what price.
Consider consolidating crypto holdings into fewer wallets to simplify the allocation process.
Review your estate plan to ensure it properly addresses your crypto assets under these new rules.
We Can Help Protect Your Digital Legacy
We understand the intersection of estate planning and digital assets. We can help ensure your crypto holdings are properly documented and integrated into your life & legacy plan.
This article is a service of the Law Office of Keoni Souza, an estate planning law firm in Honolulu, Hawai`i. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a Family Wealth Planning Session, during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by contacting our office today to schedule a planning session and mention this article to find out how to get this $750 session at no charge.
Disclaimer: All information on this website is for informational purposes only and is not legal advice. You should contact an attorney trained to work with families on estate planning matters regarding your specific situation. Use of and access to this website or any of the email links contained within the site do not create an attorney-client relationship between the Law Office of Keoni Souza, LLC, and any users or any other party.
