Comprehensive Guide to Revenue Procedure 24-28 and Form 1099-DA

The IRS has introduced Revenue Procedure 2024-28 and Form 1099-DA to enhance tax compliance and transparency in the digital asset sector. These updates establish critical changes, including wallet-specific cost-basis tracking and new broker reporting requirements. Effective January 1, 2025, taxpayers and brokers must adapt to these rules to ensure accurate reporting and compliance. With digital assets becoming mainstream and widely adopted, understanding and implementing these rules is crucial for taxpayers, brokers, and intermediaries alike.

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Why Is the IRS Introducing New Crypto Reporting Rules?

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The IRS is addressing significant gaps in tracking gains, losses, and cost basis as cryptocurrency adoption grows. With over 50 million digital asset users in the U.S. and decentralized platforms complicating oversight, traditional reporting frameworks have struggled to ensure accurate compliance. Digital assets have unique characteristics, such as decentralized custody and pseudonymous transactions, which make tax tracking more complex. As a result, these new rules aim to improve transparency, and accountability, and ensure that taxpayers are meeting their obligations under the tax code.

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IRS Objectives:

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1. Improving Reporting Accuracy: The IRS mandates wallet-specific cost-basis allocation to ensure taxpayers report gains and losses correctly.
2. Requiring Broker Compliance: Brokers, such as cryptocurrency exchanges (like Coinbase, Kraken, and Gemini), must now submit detailed transaction data using Form 1099-DA.
3. Reducing Underreporting: By standardizing reporting rules, the IRS aims to close tax gaps and align digital asset taxation with traditional financial asset reporting.
4. Facilitating Taxpayer Compliance: Providing clear, structured rules simplifies tax preparation for digital asset holders and their tax advisors.

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The combination of these measures reflects a growing effort to align digital asset taxation with broader financial regulations, ensuring accuracy and fairness.

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What Is Revenue Procedure 24-28?

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Revenue Procedure 2024-28 establishes a safe harbor for taxpayers to allocate unused cost basis for digital assets held in wallets or accounts as of January 1, 2025. In the past, taxpayers could aggregate cost basis across multiple wallets, often relying on universal tracking methods. However, this approach has been inconsistent and difficult to audit. The new rules now mandate wallet-by-wallet or account-by-account basis tracking, creating a standardized and transparent process.

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What Does It Mean for Taxpayers?

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1. Mandatory Migration: Taxpayers must transition to wallet-specific tracking starting January 1, 2025, or before their first digital asset transaction in 2025.
2. Accurate Records: Taxpayers must document all acquisition details, including dates, cost basis, and fair market value for each digital asset.
3. Irrevocable Allocations: Once cost basis allocations are made, they cannot be adjusted retroactively, emphasizing the need for precise recordkeeping.
4. Consistent Tracking: Wallet-specific tracking aligns reporting standards with other financial assets, ensuring clarity and accountability for both taxpayers and regulators.

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For detailed guidance, refer to the full IRS publication of Revenue Procedure 2024-28 here.

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How to Implement the Safe Harbor Allocation Plan

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The Safe Harbor Allocation Plan enables taxpayers to transition from universal basis tracking to the wallet-specific approach efficiently. Under this plan, taxpayers can allocate unused cost basis for digital assets as of January 1, 2025, using one of two methods:

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1. Specific Unit Allocation: This approach allows taxpayers to identify and assign cost basis to individual digital asset units using unique identifiers such as:some text
   • Acquisition date
   • Purchase price
   • Wallet or transaction ID
2. This method is ideal for taxpayers who want precise control over their allocations and can maintain detailed records for compliance.
3. Global Allocation: Taxpayers can apply a standardized rule, such as First In, First Out (FIFO) or Last In, First Out (LIFO), across all wallets or accounts holding the same asset type. This simplifies the allocation process but may be less tax-efficient depending on market conditions.

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Key Requirements for Safe Harbor:

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• Taxpayers must document their chosen allocation method before the earlier of:some text
  • The first digital asset transaction in 2025, or
  • The tax filing deadline for the 2025 tax year.
• Detailed records must include the total holdings, unused cost basis, and acquisition history for each asset.
• Once recorded, allocations are final and cannot be revised retroactively.

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Form 1099-DA: Enhancing Digital Asset Reporting

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Form 1099-DA is a new IRS reporting requirement for brokers facilitating digital asset transactions. The form is designed to improve transparency, helping both taxpayers and the IRS track digital asset gains, losses, and tax obligations more accurately.

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What Must Brokers Report?

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Brokers must provide detailed transaction information for their customers, including:

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• Proceeds from digital asset sales or exchanges.
• Cost basis and acquisition details for each transaction.
• Fair market value at the time of sale, transfer, or exchange.

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Who Must Issue Form 1099-DA?

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Brokers, including cryptocurrency exchanges, trading platforms, and other intermediaries like Coinbase, Kraken, and Gemini, must issue Form 1099-DA to taxpayers and the IRS.

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Key Deadlines for Brokers:

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• Brokers must issue Form 1099-DA by January 31 of each year for transactions in the prior tax year.
• Taxpayers must incorporate this data when filing their annual returns to report gains or losses accurately.

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Compliance Steps for Taxpayers

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To comply with Revenue Procedure 24-28 and Form 1099-DA, taxpayers should take the following steps:

1. Evaluate Digital Asset Holdings: Identify all wallets and accounts containing digital assets as of January 1, 2025.
2. Choose the Best Allocation Method:some text
   • Use Specific Unit Allocation for detailed and optimized cost-basis tracking.
   • Apply Global Allocation (e.g., FIFO) for a simplified, uniform approach.
3. Maintain Accurate Records:some text
   • Track acquisitions, transfers, and sales of digital assets.
   • Document unused cost basis and ensure compliance with wallet-specific tracking requirements.

Simplify Compliance with Kryptos Tax

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Managing digital asset compliance manually can be overwhelming. Taxpayers can use Kryptos Tax to streamline the process by:

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• Automating cost-basis tracking and allocation.
• Supporting both specific unit and global allocation methods.
• Integrating directly with broker-provided data for seamless reporting.

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Example: John holds Bitcoin in Wallet A (10 units, $1,000 basis) and Wallet B (20 units, $2,000 basis). Using Kryptos Tax, he can efficiently allocate basis to these wallets, ensuring compliance before his first 2025 transaction.

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Compliance Steps for Brokers

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Brokers must implement significant system upgrades to comply with Form 1099-DA and wallet-specific tracking requirements:

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1. Upgrade Data Management Systems: Ensure systems can accurately capture detailed digital asset transaction data, including acquisition costs and market values.
2. Adopt Wallet-Specific Basis Tracking: Transition from aggregate tracking to wallet-specific reporting, as required under Revenue Procedure 24-28.
3. Leverage Kryptos Enterprise:some text
   • Automate transaction tracking and generate Form 1099-DA efficiently.
   • Reduce manual errors and ensure timely reporting to the IRS and taxpayers.

Example: A major exchange integrates Kryptos Enterprise to manage cost-basis calculations, automate reporting, and comply with new IRS standards without disruption.

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Important Timelines to Remember

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• Pre-2025: Begin organizing digital asset records and implementing tracking systems.
• January 1, 2025: Wallet-specific cost-basis tracking becomes mandatory.
• January 31, 2026: Brokers must issue Form 1099-DA for the 2025 tax year.
• April 2026: Taxpayers file 2025 tax returns, incorporating Form 1099-DA data.

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FAQs

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1. Who is required to issue Form 1099-DA?

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Brokers, such as cryptocurrency exchanges and intermediaries, are required to issue Form 1099-DA for digital asset transactions.

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2. Are wallet-to-wallet transfers taxable under Revenue Procedure 24-28?

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No, wallet-to-wallet transfers are not taxable events. However, accurate records must be maintained to distinguish these from taxable transactions.

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3. Can I save on taxes using Revenue Procedure 24-28?

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Yes. By choosing Specific Unit Allocation, taxpayers can minimize capital gains by selling higher-cost assets first.

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4. What happens if I don’t comply with these rules?

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Non-compliance can lead to penalties, IRS audits, and additional interest on underreported taxes.

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5. How does Kryptos help with compliance?

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Kryptos Tax and Kryptos Enterprise automate cost-basis tracking, streamline allocations, and ensure IRS-compliant reporting for taxpayers and brokers.

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Conclusion

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Revenue Procedure 24-28 and Form 1099-DA represent a pivotal shift in digital asset tax compliance. By requiring wallet-specific tracking and introducing structured reporting, the IRS is working to close gaps, improve accuracy, and align crypto taxation with traditional financial assets.

Platforms like Kryptos Tax and Kryptos Enterprise empower taxpayers and brokers to automate cost-basis tracking, simplify reporting, and meet IRS requirements efficiently. Adopting these tools ensures a smooth transition to compliance, reduces manual effort, and eliminates costly errors.