Universal Wallet Accounting is Coming to an End. What Does That Mean?

Imagine you’ve purchased the same cryptocurrency multiple times:

• 1 Bitcoin at $20,000 in Wallet A
• 0.5 Bitcoin at $25,000 in Wallet B
• 0.3 Bitcoin at $30,000 in Wallet C

Using universal wallet accounting, you can treat all 1.8 Bitcoin as if they’re in one account. When you sell 0.5 Bitcoin, you could choose to use the cost basis of $30,000 (Wallet C), reducing your taxable gains. This flexibility made tracking simpler and allowed for strategic tax planning.

Starting January 1, 2025, the IRS will no longer allow universal wallet accounting for tax purposes. Under the new rules:

• Account-by-Account Reporting: You’ll need to report cryptocurrency transactions based on the specific wallet or account where the assets are held. Each sale must match the cost basis from the wallet it came from.
• End of Flexible Basis Selection: You can no longer choose the highest cost basis across all holdings. Instead, the basis must align with the specific account used for the transaction.
• Safe Harbor for Reallocating Basis: To help with the transition, the IRS is offering a safe harbor. Taxpayers can reallocate unused basis among their cryptocurrency holdings as of January 1, 2025, ensuring all cost basis data is properly aligned with specific wallets.

The new rules mean investors and taxpayers need to adopt more precise tracking methods and adjust their strategies. Here’s how you can get ready:

1. Organize Your Accounts and Records

• Identify all the wallets, exchanges, and accounts where you hold cryptocurrencies.
• Gather transaction histories and ensure records are complete and accurate.
• Use cryptocurrency portfolio tracking software to streamline the process.

2. Align Your Cost Basis

• Review your purchase history for each wallet or account.
• Take advantage of the IRS safe harbor to reallocate unused cost basis by January 1, 2025. This will help you start the new year with accurate records.

3. Plan for Potential Tax Implications

• Without the flexibility of universal wallet accounting, some transactions may result in higher taxable gains. Work with a tax advisor to plan for the impact.
• Consider tax-loss harvesting by selling underperforming assets before the year-end to offset gains.

4. Stay on Top of Reporting

• Ensure your tax filings align with the new account-by-account requirements. Mistakes or omissions can lead to penalties.
• Use tax software or consult a professional to handle complex cryptocurrency reporting.

5. Think Holistically About Your Financial Plan

• Cryptocurrency is just one part of your portfolio. Assess how these changes affect your broader financial goals.
• Diversify investments to reduce risk and minimize the impact of unfavorable tax rules on any single asset class.

• Nature of Digital Assets: Cryptocurrencies often exist across decentralized systems, making it possible for individuals to hold them in multiple wallets or platforms without centralized reporting. Universal wallet accounting provided a simplified way to aggregate and report holdings across those locations.
• Regulatory Focus: The IRS has been increasing scrutiny of cryptocurrency transactions due to the complexities and potential for underreporting. The transition to account-by-account reporting is part of broader efforts to improve transparency and compliance in the rapidly evolving digital asset space.
• Established Rules for Other Assets: Traditional financial assets already require account-specific reporting. For example, when selling stock, you typically must report the specific cost basis from the brokerage account it was held in, unless using a consistent accounting method like FIFO (First In, First Out).