🏦 IRS Crypto Safe Harbor Explained!

There is an important IRS deadline every crypto investor needs to know about.

Dec 30, 2024

Hey Thinkers 💡

I recently had an insightful discussion with Clinton Donnelly, CEO of CryptoTaxAudit, focusing on the IRS Crypto Safe Harbor Plan and its implications for cryptocurrency investors. Here's a comprehensive overview:

IRS Safe Harbor Plan (Revenue Procedure 2024-28):

Effective January 1, 2025, the IRS introduces a Safe Harbor provision under Revenue Procedure 2024-28, emphasizing wallet- and account-specific cost basis tracking for digital assets. This shift from universal accounting methods like FIFO (First-In-First-Out) or LIFO (Last-In-First-Out) requires taxpayers to meticulously track the cost basis and acquisition dates for each digital asset within individual wallets or accounts.

Form 1099-DA:

Beginning in 2025, cryptocurrency exchanges are mandated to issue Form 1099-DA to customers, detailing proceeds from all crypto transactions. By 2026, these forms will also report the cost basis, providing the IRS with comprehensive insights into taxpayers' crypto activities. This increased transparency underscores the importance of accurate record-keeping to ensure compliance and prevent discrepancies.

Preparing for the 2025 Tax Season:

To align with these regulatory changes, consider the following steps:

Detailed Record-Keeping: Maintain comprehensive records of all crypto transactions, including acquisition dates, purchase prices, and the specific wallets or accounts involved.
Software Utilization: Employ crypto tax software that supports wallet-by-wallet accounting to streamline the tracking process.
Professional Consultation: Engage with tax professionals specializing in cryptocurrency to navigate the evolving tax landscape effectively.

Potential Changes Under the Trump Administration:

President-elect Donald Trump has proposed eliminating capital gains taxes on U.S.-issued cryptocurrencies, aiming to position the U.S. as a global crypto hub. If implemented, this policy could significantly impact crypto taxation, potentially exempting gains from certain digital assets from taxation. However, until such policies are enacted, compliance with existing IRS regulations remains essential.

Key Takeaways:

Immediate Action Required: With the Safe Harbor provision taking effect on January 1, 2025, it's crucial to adjust accounting practices promptly to comply with the new requirements.
Enhanced IRS Oversight: The introduction of Form 1099-DA signifies increased IRS scrutiny over crypto transactions, making accurate reporting imperative.
Stay Informed on Policy Developments: Monitor potential policy changes under the incoming administration that could affect crypto taxation.

For a more in-depth understanding and expert insights from Clinton Donnelly, you can watch the full interview here:

IRS Gets Sued!

In recent IRS-related news, the IRS finalized the second half of its broker rule, requiring most DeFi front-ends to implement KYC measures for users starting in 2027. This announcement, made on December 27th, was met with immediate resistance. Just 24 hours later, the DeFi Education Fund, the Blockchain Association, and the Texas Blockchain Council filed a lawsuit in the U.S. District Court for the Northern District of Texas. The lawsuit challenges the IRS and Treasury Department’s final “broker” rule, arguing that it exceeds their statutory authority, violates the Administrative Procedure Act (APA), and is unconstitutional.

Crypto lawyer Jake Chervinsky weighed in on the matter, tweeting:

“This unlawful rule is the dying gasp of the anti-crypto army on its way out of power. It must be struck down, either by the courts or the incoming administration. When this rule was proposed, thousands of pages of comment letters were filed explaining why it exceeds IRS's statutory authority and violates the Constitution. This isn't what Congress meant by 'broker,' nor what the founders meant in the Bill of Rights.”

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