If you’ve been trading or holding digital assets, some significant tax changes are heading your way, and they could shake up how you track and report your transactions. Starting January 1, 2025, the universal accounting method is going away. In its place, the IRS is introducing a wallet-by-wallet approach—and they’re offering a one-time safe harbor to make the transition a little easier. This article will outline what’s changing and how you can prepare.

Defining Digital Assets

At its core, a digital asset is a type of digital record. The most common form of digital assets that most people are familiar with is cryptocurrencies, like Bitcoin or Ethereum. These are decentralized digital currencies without a central bank, using cryptographic functions for secure financial transactions. Beyond cryptocurrencies, there’s an expanding universe of digital assets, which includes NFTs. Unlike cryptocurrencies, where each unit (e.g., one Bitcoin) is the same as every other unit, NFTs are unique and can’t be exchanged on a one-for-one basis. This uniqueness often represents ownership of a particular item or content in the virtual world, such as art, collectibles, or even real estate.

The Universal Method: What It Was and Why It’s Ending

For years, the universal accounting method made it easy to track your digital assets by allowing you to pool them all into one group, regardless of which wallet or account held them. This approach meant you could calculate the cost basis—the original value of an asset for tax purposes—without worrying about where the assets were stored. It worked like a big basket, where you could toss all your transactions and treat them as a single group when deciding which assets to sell.

However, this simplicity led to issues. A common problem was orphaned cost bases, which happened when parts of the cost basis weren’t clearly tied to specific assets. For example, if you moved assets between accounts or wallets, the system sometimes failed to link the original cost with the new location, leading to discrepancies. These gaps often caused mismatches between what taxpayers reported and the records maintained by brokers.

Wallet-by-Wallet Accounting: A New Standard

Starting in 2025, digital asset tracking is becoming more detailed. Every transaction, cost basis, and sale must now be recorded separately for each wallet or account, ensuring it’s tied to the specific source. This change aligns with new IRS requirements, as brokers begin including cost basis details in their reports. While this approach may seem more complex, it’s designed to improve accuracy, transparency, and consistency between your records and broker reports.

Safe Harbor: Simplifying the Transition

If you’ve been using the universal method, the switch to wallet-by-wallet accounting may feel challenging. To ease the transition, the IRS is offering a safe harbor—a one-time opportunity to allocate any unused cost bases to specific wallets or accounts. This clean slate provides a fresh start and helps ensure compliance under the new system.

How the Safe Harbor Works:

• Two Allocation Methods:
  • Assign unused cost bases to specific digital assets in a wallet.
  • Spread the unused cost bases evenly across all assets in the wallet.

• Recordkeeping Is Key: You’ll need to keep detailed records of everything—how many assets are in each wallet, their cost bases, and when you bought them.
• Deadline Alert: The safe harbor is only available until January 1, 2025. After that, you’re locked into wallet-by-wallet accounting with no do-overs.

How to Prepare: Steps You Can Take

The clock is ticking, but don’t worry. There are a few ways you can get ready for these changes and make the transition as smooth as possible:

Still Some Questions

Even with these new rules, some gray areas remain. For instance, what does the IRS consider a “reasonable” allocation under the safe harbor? And how will they handle allocations calculated using third-party software? These are details we hope to see clarified soon.

• Simplify Your Setup: If you have digital assets spread across multiple wallets, consider consolidating them into fewer accounts. This can make recordkeeping easier, but keep in mind the risks of putting too many eggs in one basket.
• Use Tax Tools Built for Crypto: Investing in software that’s designed for digital asset taxes can save you time and headaches. Many tools now support wallet-by-wallet accounting and can generate reports that meet the new requirements.
• Strategically Sell and Rebuy: One option is to sell all your digital assets before the safe harbor deadline and repurchase them afterward. This resets their cost bases and eliminates the need to allocate unused amounts. Just be mindful of potential taxes on any gains or losses.
• Manually Allocate Your Basis: If you don’t want to consolidate or sell, you can manually assign unused cost bases using the safe harbor rules. It’s more work, but it ensures you’re compliant with the new system.

What’s Next for You?

These changes might feel like a lot, but they’re also an opportunity to get your digital asset tracking in better shape. The new wallet-by-wallet method is all about creating consistency and transparency in reporting—and the safe harbor gives you a one-time chance to make the transition as smooth as possible.

Now’s the time to act. Whether that means consolidating your wallets, getting the right tools, or seeking help from a tax professional, taking proactive steps before January 2025 will ensure you stay ahead.