2025 is a transformative year for cryptocurrency taxation in the United States. With the Internal Revenue Service (IRS) implementing a new regulatory framework, digital asset holders and tax professionals must adapt to a host of changes that impact how crypto transactions are tracked, reported, and taxed. These revisions are intended to improve tax compliance, reduce ambiguity, and align crypto reporting more closely with traditional financial instruments. Understanding these updates is essential—not just to avoid penalties, but to make informed tax planning decisions.

The Shift to Wallet-Based Cost Basis Tracking

One of the most consequential changes is the IRS’s decision to move away from universal cost basis tracking to a wallet-by-wallet tracking model, effective January 1, 2025. Under the previous regime, taxpayers could aggregate their holdings across multiple wallets and exchanges, allowing them to apply gains and losses from a pooled basis—a method that offered simplicity but lacked precision.

Now, with Revenue Procedure 2024-28, each wallet or exchange account must maintain its own basis records. This means that when you move crypto from one wallet to another, the cost basis does not automatically transfer. Instead, the wallet receiving the transfer must have a documented basis or it may be treated as having a basis of zero, triggering potential gains upon future sale.

This change matters because failure to maintain wallet-level records could lead to overreporting of gains or disallowance of legitimate losses. It also means the taxpayer must think of each wallet like a separate brokerage account, each requiring careful tracking.

Documenting Basis When Transferring Assets Between Wallets

When transferring digital assets between wallets, it’s essential to maintain accurate records to preserve the cost basis. Taxpayers should document the following:

• Transaction Details: Date and time of the transfer, amount of cryptocurrency transferred, and the wallet addresses involved.
• Original Acquisition Information: Date of acquisition, purchase price, and any associated fees.
• Supporting Documentation: Screenshots, transaction IDs, and confirmations from exchanges or wallets.

This information should be provided to the custodian of the receiving wallet, so that the custodian will be able to report the gain properly on the new 1099-DA. Maintaining these records ensures that the cost basis is accurately reflected when the assets are eventually sold or exchanged and will save you a lot of time later when you would otherwise have to correct the 1099-DA.

The Safe Harbor Provision: A Transition Tool

Recognizing that many taxpayers may not have detailed historical records for each wallet, the IRS has introduced a Safe Harbor provision. This allows taxpayers to reasonably allocate the unused basis of their digital assets to individual wallets as of January 1, 2025, based on their own records.

Electing this Safe Harbor is critical for taxpayers who want to avoid the burden of tracing prior transactions through decentralized platforms or across multiple exchanges. However, the allocation must still be reasonable and based on evidence (such as spreadsheets, exchange reports, or blockchain records). 

Electing a Safe Harbor Plan:

To utilize this safe harbor, taxpayers must complete the allocation and sign the safe harbor plan by the date and time of the first sale, disposition, or transfer of the same type of digital asset on or after January 1, 2025.  There is no requirement to provide a copy of the safe harbor plan or allocation to the IRS.  It should be maintained in your records to be used in the event of an audit. Finally, the plan statement should specify that the taxpayer is electing the Safe Harbor under Revenue Procedure 2024-28 and describe the reasonable allocation method applied.

Audit Protection:

Electing the Safe Harbor provides a level of audit protection, as the IRS considers reasonable allocations made under this provision to be acceptable, provided the taxpayer maintains adequate documentation. This protection helps mitigate the risk of disputes over basis calculations during an audit for transactions prior to January 1, 2025.

Accounting Methods: What’s Allowed Now

To compute gain or loss on cryptocurrency transactions, taxpayers must choose an accounting method. For 2025, the IRS has clarified which methods are acceptable and when they can be used.

• First-In, First-Out (FIFO) is the default method, whereby the earliest acquired coins are considered sold first.
• Specific Identification is also permitted, so long as the taxpayer can identify the specific units being sold (via transaction IDs or blockchain data).

Through IRS Notice 2025-7, temporary relief has been granted for 2025: taxpayers can still use Specific Identification—even if their exchange does not allow them to select units before the sale—if they can document the selection after the fact. However, this exception may not apply after 2025.  Going forward, it is likely that the taxpayer will have to inform the exchange of the specific units to be sold prior to their sale.

Understanding the permitted accounting methods is essential because they can significantly impact your tax liability. Using FIFO often results in higher taxable gains in a rising market, while Specific ID may lower the reported gain—but only if allowed and well-documented.

New Reporting Form: The 1099-DA

Beginning in 2025, brokers – including centralized exchanges – are required to issue Form 1099-DA to both the IRS and taxpayers. This form is specifically designed to report digital asset transactions, much like a 1099-B is used for stocks.

The form includes the type and amount of crypto sold, the date of acquisition and sale, gross proceeds, and, if available, the cost basis. However, the IRS has made the reporting of basis information optional for 2025, with mandatory basis reporting likely to follow in subsequent years.

Receiving this form will help taxpayers reconcile their records with IRS data—but errors or inconsistencies could trigger audits or penalties. Taxpayers must review these forms carefully and ensure they match their own calculations.  As mentioned earlier, providing basis information as the taxpayer transfers digital assets between custodians will help to keep this reporting more accurate.

Why These Changes Matter

Together, these changes represent a significant increase in regulatory oversight and enforcement capability for the IRS. For taxpayers, the implications are clear: poor recordkeeping, incorrect basis allocation, or use of unapproved accounting methods could lead to overpaid taxes, underpaid liabilities, or even IRS scrutiny.

Staying ahead of these changes isn’t just about compliance—it’s about controlling your financial outcomes. Crypto investors should not wait until tax season to react. Instead, they should begin preparing immediately.

Action Steps and Deadlines for Taxpayers

To prepare for these changes and ensure compliance in 2025 and beyond, taxpayers should take the following steps:

• Review all existing wallets and exchange accounts to identify the cost basis of held assets and verify the completeness of records.
• Decide whether to use the Safe Harbor provision and allocate basis to wallets before the end of the 2025 tax year.
• Sign and Date the Safe Harbor provision prior to your first crypto transaction in 2025.
• Select an accounting method (FIFO, Specific ID) and apply it consistently; consult a tax advisor if unsure.
• Use tax software or professional help to organize transactions and generate accurate reports that reflect wallet-by-wallet basis tracking.
• Monitor exchanges for Form 1099-DA issuance, and reconcile those forms with your personal records during the 2026 filing season (for tax year 2025).
• Maintain documentation for every wallet and transaction, including blockchain data, exchange reports, and manually maintained logs.

Final Thoughts

The IRS’s 2025 crypto tax reforms are designed to close loopholes, improve reporting consistency, and integrate digital assets into the broader tax system. While this adds complexity, it also provides clearer rules for those willing to do the work. Taxpayers who adapt early—through sound recordkeeping, software tools, and professional guidance—will be better positioned to navigate this evolving landscape while minimizing their tax burden and exposure.

You’ve read the rules—now make a plan.
If your crypto activity spans multiple wallets or exchanges, now is the time to align your records and strategy. We’re here to help.

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