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Why You’re in Tax Trouble If You Didn’t Update Your Crypto Accounting Before January 1st

Cryptocurrency investors, especially those navigating the dynamic world of Web3, need to stay vigilant about evolving tax regulations. If you haven’t updated your crypto accounting for 2024 by the IRS-mandated January 1st deadline, you could face significant tax complications. In this blog post, we’ll break down why this issue is critical, what the implications are, and how to take corrective action.

Understanding the IRS Revenue Procedure 2024-28

In June 2024, the IRS released Revenue Procedure 2024-28, requiring cryptocurrency investors to transition from universal accounting to account-based reporting. This change was a significant shift for taxpayers who previously relied on older accounting methods like HIFO (Highest In, First Out) or LIFO (Last In, First Out). The Safe Harbor deadline for compliance was set for January 1, 2025.

Despite the importance of this change, many investors missed the mark. Why? Some were unaware of the revenue procedure entirely, while others received inaccurate guidance from CPAs, tax professionals, or media sources. This lack of awareness and clarity has left numerous taxpayers non-compliant, increasing their exposure to penalties, interest, and potential audits.

The Consequences of Missing the Deadline

Failing to update your crypto accounting by the IRS deadline can lead to several complications:

  1. Increased Audit Risk Non-compliance with the revenue procedure puts taxpayers at a higher risk of audits. If audited, the IRS could recalculate tax liabilities, leading to unexpected expenses.

  2. Defaulting to FIFO Without proper standing orders and documentation, taxpayers who missed the deadline are required to use the FIFO (First In, First Out) accounting method. For those who previously relied on more tax-advantageous methods like HIFO or LIFO, this could result in higher tax liabilities.

  3. Misalignment with Broker Reporting Starting in 2025, 1099 forms from brokers will align with account-based reporting. If your records don’t match the brokers’ submissions, it could trigger discrepancies, tax notices, and potential penalties.

  4. Penalties and Interest The Safe Harbor deadline protected taxpayers from penalties and interest. Missing it means these charges could apply if discrepancies arise in your tax filings.

Common Misconceptions About Compliance

Adding to the confusion, the IRS issued notice in December 2024. While this notice extended the timeline for providing standing orders to brokers, it did not extend the compliance deadline for Revenue Procedure 2024-28. Many taxpayers misunderstood this, believing they had more time to comply when, in fact, they did not.

Some tax professionals and media outlets misrepresented the notice, spreading misinformation about deferred reporting. If you based your tax decisions on these headlines, it’s critical to revisit your compliance strategy immediately.

How to Get Back on Track

If you’ve missed the Safe Harbor deadline, there are still ways to rectify your crypto accounting. Here’s a step-by-step guide:

  1. Consult a Crypto-Specialized CPA Work with a CPA who has expertise in cryptocurrency accounting. Generalized advice may not address the complexities of your portfolio. At Camuso CPA, our team specializes in helping crypto investors navigate these issues.

  2. Recalculate Your Cost Basis Accurate cost basis calculations are essential for compliance. Depending on your history, you may need to:

  3. Align Future Reporting Ensure your reporting matches broker-provided 1099 forms. This alignment reduces the likelihood of discrepancies and tax notices.

  4. Understand the Implications of FIFO If you’ve defaulted to FIFO, consult with your CPA about its tax implications. Be prepared for potential liabilities if you were previously using a different method.

  5. Update Your Documentation Document your standing orders and ensure your accounting records are up to date. Compliance requires meticulous attention to detail, especially when transitioning to account-based methods.


Real-Life Scenarios: Lessons from the Field

Over the years, we’ve seen numerous taxpayers who’ve struggled with these changes. Many have been trading cryptocurrencies since 2016 but relied on universal accounting methods. When asked to shift to account-based reporting, they discovered inaccuracies in their cumulative cost basis calculations.

For such individuals, achieving compliance requires starting from scratch:

  • Reconstructing cost basis calculations for prior years.

  • Adopting account-based methods moving forward.

Others mistakenly believed they could continue using HIFO or LIFO without repercussions, only to face unexpected tax liabilities when defaulted to FIFO.

Why Compliance Matters Now

The IRS has made it clear: universal accounting methods will no longer be acceptable as of 2025. Compliance isn’t just about avoiding penalties; it’s about understanding the tax implications of your trading activities and making informed financial decisions.

As 1099 forms become standardized for account-based reporting, discrepancies between broker submissions and taxpayer filings will increase. Misaligned reports are a red flag for audits, making compliance essential for minimizing risk.

Final Thoughts

If you haven’t updated your crypto accounting to meet the requirements of Revenue Procedure 2024-28, time is of the essence. Compliance isn’t just about adhering to regulations—it’s about safeguarding your financial future.

At Camuso CPA, we’ve helped countless crypto investors navigate these challenges. From recalculating cost bases to aligning reports with IRS standards, we provide tailored solutions to bring you into compliance.

Ready to secure your crypto accounting and avoid future tax issues?

Contact our team today at CamusoCPA.com. Don’t wait for tax notices to show up in your mailbox—take action now to protect your investments.

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