On December 31, 2024, the IRS released Notice 2025-7 which provides temporary relief of Treas. Reg. § 1.1012-1(j)(3)(ii) (Revenue Procedure 2024-28) which was set to be implemented on January 1, 2025. The new regulations required digital brokers (aka wallets) to track cost basis and report sales of cryptocurrencies. The IRS and the Treasury Department determined that some digital brokers did not have the technology needed to conform to the requirements.
Starting on January 1, 2026 digital brokers will need to track and report cryptocurrency sales to the IRS. They will also be required to track the cost basis of the currencies. If the taxpayer does not provide the cost basis of the shares the default method will be FIFO (First In First Out), which means the cost of the oldest shares purchased will be considered the first sold.
For the 2025 tax year, these brokers will issue Form 1099-DA to report the digital asset proceeds in early 2026. This form will be similar to Form 1099-B which reports the proceeds from stock sales. However, brokers will only be required to report the acquisition date and cost basis for dispositions that are “covered transactions,” that is purchase made after December 31, 2026.
What do taxpayers with crypto assets need to do?
Cryptocurrency will be managed like stock held by various brokers. You can hold shares of the same company stock at different brokerage houses – however when you sell your shares your cost basis is determined by what is held at the brokerage where you sold the shares (it is not averaged against all of your holdings). Cryptocurrency will be the same way with different wallets starting on January 1, 2026. Additionally, the cost basis of the cryptocurrency will be calculated using FIFO (first in first out) which takes the basis of the oldest holdings when you sell. If you have used other methods to track your cost basis or have used FIFO on your global holdings vs. each wallet, then you will need to calculate and confirm with each individual wallet the cost basis moving forward. You will not be able to adjust the cost basis after January 1, 2026.
The IRS issued Revenue Procedure 2024-28 providing safe harbor on calculating your basis on FIFO or specific identification since prior IRS FAQ guidelines allowed for either method. This also provides detailed rules for applying the reasonable allocation and discusses how the safe harbor applies.
A few notes on general cryptocurrency tax treatment:
For US tax purposes cryptocurrency is treated as property rather than currency. This means that when a digital asset is sold or traded the gain or loss on the transaction is treated as capital gains/losses.
Wash sale rules that apply to securities do not apply to cryptocurrency because cryptocurrency is currently not considered a security under US tax laws. That means that you can sell your holdings at a loss, repurchase that same currency within 30 days at the new reduced rate, and the loss is allowed to be taken on the tax return.
If cryptocurrency is earned from mining, a reward, or if a taxpayer is paid for goods or services with cryptocurrency, that is income. These transactions are treated as ordinary income to the taxpayer. However, if there is a gain or a loss on the sale of personal property, that may be taxed as a capital gain or loss depending on the item sold.
Access qualified support for your crypto tax returns
The experienced tax team at Aura Advisors offers deep expertise when it comes to reporting activity related to cryptocurrency and other digital assets. Whether you’re buying, selling, or mining crypto, or making other transactions, we’ll help quantify and report so you avoid IRS complications.
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