The Internal Revenue Service (IRS) has steadily increased its focus on cryptocurrency taxation. As the crypto market continues to evolve, so too does the regulatory landscape. The IRS has issued several Revenue Procedures (Rev. Proc.) that provide specific guidance on reporting and paying taxes on cryptocurrency transactions.
It’s important that the crypto investors, traders, and businesses thoroughly understand the revenue procedures.They outline the specific rules and regulations that apply to various crypto-related activities, including buying, selling, trading, and staking. Non-compliance with these rules can lead to significant tax penalties.
In this blog post, we’ll delve into the key insights from the IRS Revenue Procedures. We’ll break down complex tax rules into easy-to-understand terms, helping you confidently navigate the complexities of crypto taxation.
Understanding IRS Revenue Procedure 2024-23
The Revenue Procedure 2024-23 offers guidance on general accounting method changes, streamlining the process for taxpayers. It explains how businesses can automatically obtain consent to shift certain accounting methods without requiring prior approval from the IRS. While this procedure doesn’t specifically target crypto investors, its emphasis on simplifying tax compliance is a notable aspect of ongoing IRS reforms.
For crypto investors, it’s also important to keep an eye on related updates, like Rev. Proc. 2024-28. This release will enforce new rules in 2025, requiring brokers to provide Form 1099-DA for digital assets, simplifying cost-basis reporting. These updates reflect the IRS’s broader efforts to improve clarity and compliance across various industries.
Understanding IRS Revenue Procedure 2024-28
The Revenue Procedure 2024-28 introduces essential safe harbor rules for managing the cost basis of digital assets. These rules are especially important for taxpayers preparing for the January 1, 2025, compliance deadline.
Instead of treating your entire crypto portfolio as a single entity, you must now allocate the cost basis for each wallet and account separately. This change impacts how you track and report your crypto transactions, requiring more detailed record-keeping. Let’s understand the changes in detail:
Important Changes From Revenue Procedure 2024-28
Here are some of the key changes from Rev. Proc. 2024-28:
Introduction of Form 1099-DA
The IRS plans to implement Form 1099-DA to simplify how brokers report digital asset transactions. Starting 2025, brokers must use this form to report gross proceeds from digital asset sales for transactions made after 2024.
Like traditional 1099 forms for securities, Form 1099-DA is tailored explicitly for crypto, ensuring better alignment with the evolving digital asset market. If you’re familiar with prior crypto 1099 forms, expect updated processes that reflect the unique nature of digital assets.
Stricter Cost Basis Tracking and Allocation
Revenue Procedure 2024-28 introduces stricter rules for tracking and allocating the cost basis of digital assets. Your cost basis represents the original value of your crypto and plays a vital role in calculating taxable gains or losses. The IRS will require detailed record-keeping to ensure accurate cost-based reporting for each transaction.
Safe Harbor for Allocating Unused Basis
One of the major updates is the safe harbor provision for unused cost bases in digital assets. Effective January 1, 2025, this allows taxpayers to assign unused basis to assets held at that time. To use this benefit, you must maintain accurate records that meet the IRS’s specific requirements. This provision offers clarity and relief for investors struggling with basis allocation complexities.
How Will It Affect Crypto Investors In The US?
The IRS’s recent updates on crypto tax compliance introduce significant changes for investors in the United States. These measures aim to improve reporting accuracy and close tax gaps, but they also increase responsibilities for brokers and investors. Let’s break down how these changes might impact you as a crypto investor.
Brokers’ New Reporting Obligations
Starting 2025, brokers will be required to issue Form 1099-DA to taxpayers. This document will include transaction details such as the cost basis and proceeds from crypto sales. The goal is to ensure transparency and minimize discrepancies between what investors report and what the IRS has on record.
This change reduces the risk of penalties or audits caused by mismatches in reported data. While the forms will officially be distributed to investors in 2026, some exchanges, like Coinbase, have expressed the need for additional time to implement these processes. For investors, this means brokers will handle a larger part of the reporting process, but it also requires individuals to ensure their records match what’s on the forms.
Accurate Cost Basis Tracking for Investors
Investors will face new rules for tracking the cost basis of their digital assets. Rev. Proc. 2024-28 introduces basis allocation guidelines, allowing investors to divide the cost basis across different units of crypto held in their accounts before 2025.. This helps accurately calculate gains or losses during future transactions.
However, this allocation process is irreversible, so getting it right the first time is critical.. Keeping meticulous records of acquisition dates and costs will now be more important than ever, especially when preparing tax returns. The safe harbor option provides clarity, but it requires disciplined record-keeping.
Increased Responsibility Amid Stricter Compliance
The IRS’s push for tighter crypto tax compliance will undoubtedly streamline reporting and reduce errors. However, it also pressures investors to maintain detailed records of every transaction. With brokers handling more reporting, your role shifts to verifying and reconciling these reports with your records. While the updates aim to simplify tax filing in the long run, they introduce an initial learning curve for many investors navigating these new rules.
How Should Investors Handle Cost Basis Tracking?
Starting January 1, 2025, new rules for tracking crypto investments are coming into play. Investors who previously used methods like FIFO (First In, First Out) without wallet-based cost tracking must switch to a wallet-based cost tracking system. So, what does this mean for you? Let’s break it down.
In simple terms, you’ll need to track the cost basis of your crypto assets based on each wallet. The cost basis is the original value you paid for your crypto, and it’s important for calculating taxes. With wallet-based tracking, you assign the cost basis of each asset to the specific wallet where it’s stored. This ensures more accurate reporting when you sell or trade your crypto.
Your crypto tax software plays a big role here. It should help you manage the transition to wallet-based tracking. Platforms like KoinX, allow you to adjust your cost basis method depending on where you live. For example, you can switch methods to meet the tax rules in your country or state.
Why Is KoinX The Best Crypto Tax Calculating Software In The USA?
Dealing with crypto taxes in the USA is a real headache. Every time you buy, sell, or trade crypto, you must track the transaction for tax purposes. Imagine doing this for hundreds of trades—it’s exhausting! Even worse, a tiny mistake could mean big trouble.
The IRS isn’t kind to errors, and you could face huge fines or penalties if your calculations are wrong. KoinX is here to save the day! This powerful crypto tax software takes the stress out of managing your taxes. It handles everything automatically, so you can focus on growing your crypto investments instead of crunching numbers.
Here’s what KoinX offers its users:
- Accurate Previews for Smart Decisions: KoinX uses advanced technology to give you a clear picture of your capital gains and losses. This means you can see how much you’re making—or losing—before making your next trade.
- Automatic Transaction Categorization: Say goodbye to manual work! KoinX automatically sorts your transactions into categories like income, trades, or purchases. This saves hours of effort and keeps everything organized.
- Detailed Tax Reports in Minutes: Filing taxes doesn’t have to be painful. KoinX creates detailed tax reports for you, ready to be filed with the IRS. This saves you time, reduces errors, and can even help you avoid spending extra money on tax advisors.
- Allows You To Change Accounting Method: KoinX is one of the few crypto tax software that allows you to change your cost basis method based on your geographic location. This way, you can stay on the right side of the law by correctly calculating your gains and losses.
How Can You Change Your Cost Basis Method On KoinX?
With the IRS no longer permitting the use of FIFO as an accounting method, it’s time to upgrade to software that lets you adapt your accounting approach to meet legal requirements. At KoinX, you can change your crypto accounting method as per your choice.
Here’s how you can do that:
Step 1: Login to your KoinX account.
Step 2: Select your name and navigate to the ‘Settings’ section.
Step 3: In the settings menu, click on “Tax and Transactions” located on the left-hand side of the screen.
Step 4: In the “Accounting Method” section, you can update the Cost Basis Method to the option that suits your preference.
Stop stressing over your capital gains and transaction records. KoinX takes care of everything for you, so you can focus on growing your portfolio. Get started now and see how easy it is to stay compliant with the IRS while maximizing your peace of mind.
Conclusion
As the crypto industry continues to mature, it’s essential to stay informed about the latest tax regulations. By understanding the IRS Revenue Procedures, you can ensure that you file accurate tax returns and avoid potential penalties. Remember, it’s always a good idea to consult a tax professional for personalized advice.
