Cryptocurrency has revolutionized the financial world, offering new avenues for investment and business transactions. However, as the adoption of digital assets grows, so does the complexity of managing their tax and accounting implications. The recent release of Revenue Procedure 2024-28 by the IRS has brought significant changes to how cryptocurrency accounting should be conducted, particularly around cost basis calculations. If you are a cryptocurrency investor or a business accepting digital assets, it’s crucial to understand these new requirements to ensure compliance and optimize your tax outcomes.

Understanding Revenue Procedure 2024-28

Revenue Procedure 2024-28 represents a pivotal shift in how the IRS expects taxpayers to account for cryptocurrency transactions. Previously, many taxpayers and even tax professionals relied on a more generalized approach to cost basis tracking, often using what is known as a “universal basis” method. This method allowed taxpayers to aggregate transactions from multiple exchanges and wallets into a single calculation, potentially optimizing their tax outcomes without necessarily reflecting the actual flow of funds.

For example, imagine you purchased Bitcoin on multiple exchanges—say Kraken and Coinbase—and later sold it on just one of those exchanges. Under the universal basis method, you could apply the highest purchase cost from any exchange to minimize your taxable gain, even if the Bitcoin sold was not the one purchased at the higher cost. While this method may have produced favorable tax results, it didn’t accurately represent the transactions as they occurred on the blockchain.

The Shift to Account-Based Accounting

The IRS has now clarified that this universal approach is no longer acceptable. Revenue Procedure 2024-28 mandates an account-based method for tracking cryptocurrency transactions, requiring that each transaction be traced back to its origin and accurately reported on an individual wallet or exchange basis. This means that if you purchase Bitcoin on Kraken and later transfer it to Coinbase, your accounting must reflect the purchase, the transfer, and the eventual sale on Coinbase. The cost basis must be tracked specifically for the Bitcoin held in each account or wallet.

The reason behind this shift is straightforward: the IRS aims to ensure that the tax outcomes reported by taxpayers truly reflect their on-chain activity. By requiring account-based accounting, the IRS can more easily verify that the reported gains or losses align with the actual transactions that occurred, thereby reducing the potential for tax evasion or errors.

Implications for Cryptocurrency Investors and Businesses

This new requirement poses several challenges for those involved in cryptocurrency transactions. Firstly, if you have been using the universal basis method or similar approaches, you may need to revisit and revise your prior years’ accounting. The accuracy of your cost basis calculations is critical, as any discrepancies can significantly impact your reported gains or losses. Inaccurate cost basis data not only affects your tax liability for the current year but also carries over to future years, compounding any errors.

Moreover, Revenue Procedure 2024-28 also restricts the blanket use of advantageous accounting methods such as Specific Identification (Spec ID) or Highest-In-First-Out (HIFO) after the fact. Instead, taxpayers must have standing orders with their brokers and a reasonable method for tracking the basis in any non-custodial wallets at the time of the transaction.

One practical recommendation for managing these complexities is to segregate tax lots into separate cold wallets by tax lot. This method simplifies the tracking process, making it easier to build an audit trail and accurately assign the correct tax lots to each transaction or sale.

Transitional Relief and Deadlines

Recognizing that the shift to account-based accounting could be burdensome for many taxpayers, the IRS has included transitional relief measures in Revenue Procedure 2024-28. These measures allow taxpayers to allocate their existing basis to individual assets and apply that basis to future sales within the same account. However, to take advantage of this relief, taxpayers must meet specific conditions and make the necessary allocations by January 1, 2025.

The deadline is fast approaching, and the work required to transition to this new accounting method should not be underestimated. If your current accounting practices do not align with these new requirements, you may need to rework several years of transactions to ensure compliance.

The Importance of Accurate Record-Keeping

Accurate record-keeping is more important than ever under these new IRS guidelines. Taxpayers must maintain detailed records that support their basis calculations, including any reasonable allocations made during the transition period. Without these records, it will be challenging to justify your tax positions during an audit.

Unfortunately, many taxpayers and even some tax professionals have not placed enough emphasis on verifying the accuracy of their ending cost basis data. This oversight can lead to significant discrepancies, which, if left unchecked, could result in substantial tax liabilities or penalties. At Camuso CPA, one of the first steps we take when onboarding a new client is to review their ending cost basis data to ensure it is accurate. This step is crucial because the ending cost basis from one year becomes the starting point for the next year’s calculations.

Conclusion

The introduction of Revenue Procedure 2024-28 marks a significant change in how cryptocurrency transactions must be accounted for in the United States. By moving to an account-based method, the IRS aims to ensure that tax outcomes accurately reflect the real-world flow of funds on the blockchain. For taxpayers, this means greater scrutiny of their accounting practices and a potential need to revise past filings.

As the January 1, 2025, deadline approaches, it is crucial to ensure that your cryptocurrency accounting is compliant with these new requirements. Accurate record-keeping, proper cost basis tracking, and timely adjustments to your accounting practices are essential steps to avoid potential issues with the IRS.

If you are unsure whether your current accounting methods meet these new standards, or if you need assistance in making the necessary adjustments, consider reaching out to a qualified CPA firm like Camuso CPA. We can help you navigate these changes and ensure that your cryptocurrency transactions are accounted for accurately and efficiently. Don’t wait until the last minute—contact us today to schedule a consultation and take the first step towards compliance.

Taking Action: What You Need to Do

Given the complexities introduced by Revenue Procedure 2024-28, it is advisable to consult with a CPA firm experienced in cryptocurrency accounting and tax compliance. A knowledgeable CPA can help you navigate these new requirements, ensure your accounting practices are up to date, and optimize your tax positions going forward.

If you are a cryptocurrency investor or a business operating in the Web3 space, now is the time to act. January 1, 2025, will be here before you know it, and the transition to account-based accounting is not something that can be accomplished overnight. Engaging with a qualified CPA firm sooner rather than later can help you avoid potential pitfalls and ensure you are fully compliant with the new IRS regulations.

At Camuso CPA, we specialize in cryptocurrency accounting and tax planning. Our team is well-versed in the latest IRS guidelines and can provide the advisory services you need to manage your cryptocurrency portfolio effectively. Whether you need assistance with revising past accounting, establishing new accounting practices, or planning for future tax liabilities, we are here to help.

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About Camuso CPA At Camuso CPA, we understand the unique challenges faced by digital asset investors and Web3 businesses. Our mission is simple: to save you money, time, and provide peace of mind through effective tax planning strategies, accurate accounting, and proactive advice.

Why Choose Camuso CPA? Expertise Tailored to Your Needs: Unlike other firms, we specialize in serving digital asset investors and Web3 business owners. Our team has in-depth knowledge of the cryptocurrency industry, enabling us to provide customized solutions that meet your specific requirements.

Pioneers in the Field: Camuso CPA has been at the forefront of the industry, offering cryptocurrency accounting services and tax advisory since its early days. We were also the first CPA firm to accept cryptocurrency as a form of payment for our professional services.

Comprehensive Approach: We go beyond traditional tax compliance and accounting services. Our proactive approach ensures that you benefit from strategic tax planning, minimizing your tax liabilities and maximizing your savings.

Cost Savings: Our expertise in tax planning and compliance for digital assets helps you save thousands, and even cumulatively millions, in taxes. We identify valuable deductions, credits, and exemptions that others might overlook, optimizing your financial outcomes.

Peace of Mind: With Camuso CPA by your side, you can rest easy knowing that your tax obligations are handled accurately and efficiently. We stay up-to-date with the latest developments in tax regulations and provide you with reliable guidance to navigate the ever-changing landscape.

Learn more about us here.