Rev. Proc. 2024-28 Safe Harbor Means Year-End Planning for Digital Asset Users

Earlier this summer the IRS issued final regulations on information reporting requirements for digital assets, including determining amount realized and basis allocations. At the same time, the regulatory body also provided safe harbor relief for taxpayers to substantiate their basis allocations through Revenue Procedure 2024-28. This could present a tax planning opportunity at year-end for those holding digital assets.

A Look Back at the Progression of the Digital Asset Regulatory Landscape

To understand the significance of Rev. Proc. 2024-28, it’s important to understand the regulatory backdrop of digital asset taxation.

Digital Assets Treated as Property for Tax Purposes

In 2014, the IRS issued Notice 2014-21, clarifying that digital assets are treated as property for federal income tax purposes. As such, longstanding tax principles applicable to property transactions, including tracking basis to recognize gain or loss, should apply.

In October of 2019, the IRS issued a set of frequently asked questions applicable to digital assets held as investments to explain how to substantiate basis allocations. The FAQs included guidance on determining basis in digital assets that were purchased, received in certain exchanges for other property or services, and received as bona fide gifts. Pursuant to questions 39 and 40, taxpayers may specifically identify which units of digital assets they are disposing for the purposes of determining gain or loss. Taxpayers with multiple units of one kind of digital asset acquired at different times and with different basis may determine the amount of basis they are using by specifically identifying the unit of digital asset. If the specific units are not identified, a taxpayer is required to calculate gain or loss on the disposition using their earliest acquired units as the units sold (aka, first-in, first-out or FIFO).

Final Regulations End Global Wallet Treatment

Pursuant to the guidance around specific identification within the FAQs, many taxpayers took the approach that they could specifically identify digital assets based on the highest basis, regardless of whether or not that unit of digital asset was held within the wallet or account where the disposition took place. The final regulations eliminate the ability to take a global wallet approach and require taxpayers to specifically identify units held within the single wallet or account from which the digital assets are disposed.

Revenue Procedure 2024-28

The IRS issued Rev. Proc. 2024-28 to provide taxpayers a safe harbor to assist in transitioning to the multiple-wallet or account basis tracking. Subject to certain limitations, taxpayers may reasonably allocate their remaining unused basis to any wallet or account prior to January 1, 2025.

The safe harbor is available only to taxpayers who hold digital asset units that they:

• Acquire or receive in a transfer prior to January 1, 2025, and
• Hold in their wallet or account as of January 1, 2025.

The safe harbor does not apply to any digital assets acquired by or transferred to the taxpayer on or after January 1, 2025.

Taxpayers are permitted to make reasonable allocations of units of cost basis among digital asset units held prior to January 1, 2025, IF the following requirements of the revenue procedure are met:

1. Each remaining digital asset unit must be a capital asset in the hands of the taxpayer.
2. Each unit of unused basis must have been originally attached to a digital asset unit that was a capital asset in the hands of a taxpayer.
3. The digital asset unit from which the unused basis is derived and the remaining digital asset unit must be the same type.
4. The taxpayer must be able to identify and maintain records sufficient to show the total number of remaining digital asset units in each of the wallets or accounts held by the taxpayer.
5. The taxpayer must be able to identify and maintain records sufficient to show the number of units of unused basis, original cost basis of each unit of unused basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached.
6. A taxpayer must treat any allocation under the revenue procedure as irrevocable for all purposes of Section 1012.

Year-End Planning Using a Reasonable Allocation

Consult with your tax adviser to discuss how to consolidate or otherwise allocate unused basis in the most advantageous manner based on your facts and circumstances. A reasonable allocation includes identifying the remaining unused basis with sufficient records to substantiate the allocations.

Contact Contact Cynthia Pedersen, Peter Gilroy-Scott or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.