Understanding Cryptocurrency Tax Complexity and New Reporting Requirements in 2025
As cryptocurrency continues to gain traction across the globe, the tax landscape surrounding digital assets has evolved significantly. Cryptocurrency taxation has been a complex and fragmented process for both taxpayers and the government. Individuals and businesses have been required to track transactions and bases across various wallets, exchanges, and asset types. For many taxpayers, this meant relying on cryptocurrency tax aggregators to calculate taxes using different tax methodologies. With new tax laws being enacted as of 1/1/2025, let’s take a closer look at the key changes that will affect cryptocurrency taxpayers, brokers, and the broader crypto ecosystem.
The Tax Complexity of Cryptocurrency Before 2025
Before the upcoming changes, calculating cryptocurrency taxes was an inherently complex process. Taxpayers and the IRS had no tax reporting to rely on for cryptocurrency transactions. Cryptocurrency investors typically had to track a variety of transactions, from purchases and sales to staking, airdrops, and other forms of income. To calculate their tax liabilities, users often turned to crypto tax aggregators, which helped consolidate information from various wallets and exchanges.
While often imperfect, these tools provided an essential function by aggregating transaction data across multiple platforms and applying chosen tax methodologies, such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and HIFO (Highest-In, First-Out). Due to the increasingly complex world of crypto assets, determining taxation without a crypto aggregator could take dozens of man-hours.
Despite the assistance from tax aggregators, the process remained labor-intensive and prone to errors, especially as the number of wallets, exchanges, and crypto assets involved in a person’s portfolio grew. Further, the IRS has attempted to enforce compliance with small items such as a cryptocurrency question on the face of the 1040, but these measures often led to incomplete reporting or further confusion from taxpayers.
New Reporting Requirements and Broker Obligations
Starting January 1, 2025, new laws and regulations will require brokers to report cryptocurrency transactions to the IRS using Form 1099-DA. This move aims to increase transparency and compliance in the cryptocurrency space, making it easier for the IRS to track and enforce tax obligations related to digital assets. This does, however, require that taxpayers be more proactive in reporting their basis and market orders to their crypto custodians.
Form 1099-DA will function similarly to traditional tax forms used for stocks and bonds, but it is intended to accommodate the specific nature of cryptocurrency transactions. Brokers will be required to report details such as the gross proceeds from sales, the cost basis of assets sold, and the resulting gain or loss.
This regulation is intended to make it easier for taxpayers and the IRS to receive accurate and timely information about taxable crypto transactions. However, it also presents a challenge for those who have made transactions across multiple platforms or wallets, as different exchanges will have access to different data.
The Shift to “Wallet-by-Wallet” Allocation of Basis
One of the most significant changes introduced for 2025 is the requirement for taxpayers to allocate the cost basis of their cryptocurrency assets on a wallet-by-wallet basis. This regulation effectively disallows the use of a universal cost basis, where taxpayers could treat all assets of one type across all holding locations as interchangeable.
Under the new rules, individuals must now track the cost basis of assets in each wallet separately. While this may be cumbersome for individuals with large portfolios, it reflects a more granular and accurate method for determining gains and losses.
The implementation of this regulation requires careful attention to the origin of each asset, ensuring that the correct cost basis is associated with each wallet. Taxpayers will need to be diligent in tracking their transactions to avoid mistakes and penalties.
The IRS Safe Harbor for Allocating Basis Across Assets
Recognizing the potential challenges that the wallet-by-wallet allocation may present to those who have used other methodologies in the past, the IRS has introduced a safe harbor provision in Revenue Procedure 2024-28 to offer some relief. This safe harbor allowed taxpayers to allocate basis in a simplified manner, rather than having to maintain perfect asset-by-asset records. In order to do so, a taxpayer must meet these requirements:
Each remaining digital asset unit must be a capital asset in the hands of the taxpayer.
Each unit of unused basis must have been originally attached to a digital asset unit that was a capital asset in the hands of a taxpayer.
The digital asset unit from which the unused basis is derived and the remaining digital asset unit must be the same type of digital asset.
The taxpayer must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each of the wallets or accounts held by the taxpayer.
The taxpayer must be able to identify and maintain records sufficient to show the number of units of unused basis, the original cost basis of each such unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached.
A taxpayer must treat any allocation under this revenue procedure as irrevocable.
This safe harbor provision helps alleviate concerns about the practical challenges of complying with the new regulations. It provides a bridge for taxpayers who may not have the tools or systems in place to fully comply with the wallet-by-wallet requirements due to previous lack of guidance from the IRS and the varying methodologies previously used by taxpayers.
Specific Identification Methodology
Fortunately for taxpayers with cryptocurrency, the IRS has long allowed taxpayers to use adequate identification, commonly referred to as “specific identification”, to allocate the cost basis of sold assets. This method allows individuals to proactively select the exact assets being sold and identify their corresponding cost basis, rather than relying on blanket methodologies like FIFO or LIFO.
Under the new regulations, the IRS will continue to allow specific identification of assets sold. However, this practice will require enhanced record-keeping and documentation to ensure compliance, especially as taxpayers now face the challenge of tracking the cost basis on a wallet-by-wallet basis.
Temporary Relief for Specific Identification in 2025
Given the anticipated complexity of applying the wallet-by-wallet allocation method in 2025, the IRS has granted temporary relief for the tax year 2025 regarding specific identification via IRS Notice 2025-7. This temporary relief acknowledges that brokers may not have the necessary tools or infrastructure in place to allow taxpayers to appropriately make adequate identification ahead of sales. During the 2025 tax year, taxpayers will be able to elect special identification by recording their preferred order in their own books, rather than being required to notify their brokers or set standing orders
Next Steps
The crypto asset landscape is undergoing significant changes, with new tax laws and IRS reporting requirements set to take effect in 2025. Taxpayers with complex cryptocurrency situations should work with their advisors to ensure they understand their existing cryptocurrency positions, including their cost basis and holding periods of various tax lots. Furthermore, throughout 2025 taxpayers should maintain thorough records of their intended sales in order to substantiate their basis for their tax returns.
We will continue providing updates as the new President and Congress create more guidance and laws regarding cryptocurrency.
