Overview of Rev. Proc. 2024-28: What Digital Asset Users Need to Know

At a Glance

• Main takeaway: Revenue Procedure 2024-28 provides essential guidance for taxpayers on new regulations governing the calculation and allocation of cost basis for digital assets transactions.
• Impact on your business: This transition is crucial for taxpayers to ensure compliance is met when disposing of digital assets after January 1, 2025.
• Next steps: Aprio’s Blockchain and Digital Asset team can assist you with digital asset accounting and tax matters.

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The Full Story

The IRS has issued critical guidance on Rev. Proc. 2024-28 for taxpayers that addresses the shift from prior practices—such as applying first-in-first-out (FIFO) universally or using multi-wallet approaches—to the updated rules requiring basis methods to be applied at a more granular level via wallet or account. This transition is essential for taxpayers to ensure compliance when disposing of digital assets after January 1, 2025. 

With anticipated changes in tax laws under the incoming administration, taxpayers engaged in investment activities and gift, or estate planning have an opportunity to make strategic decisions that align with both short-term and long-term tax planning objectives.

The Purpose of Safe Harbor for Rev. Proc. 2024-28

The safe harbor introduced by Rev. Proc. 2024-28 allows taxpayers to allocate unused basis across digital asset units held in multiple wallets or accounts prior to January 1, 2025. This provides a practical approach for taxpayers to reconcile pre-existing basis allocations with the updated regulations.

It is essential to review and solidify basis information and, where necessary, reconcile digital asset transactions and transfers, potentially requiring a review of multiple tax years.

Scopes of Safe Harbor

The safe harbor applies under the following conditions:

1. Digital Asset Acquisition Timeline: Applies only to remaining digital asset units still held in a taxpayer’s wallet or account and acquired before January 1, 2025.
2. Exclusions: Assets acquired or transferred on or after January 1, 2025, are excluded. However, basis amounts under audit, litigation, or IRS review as of January 1, 2025, cannot benefit from safe harbor unless the issues are resolved beforehand.
3. Separate Application for Asset Types: Taxpayers must treat each type of digital asset allocation independently.
4. Substantiation: Taxpayers must maintain sufficient records to substantiate the unused basis amounts allocated.

Eligibility Requirements for Safe Harbor Use

To qualify for safe harbor, taxpayers must meet the following conditions:

1. Capital Asset Designation: All remaining digital asset units being allocated must qualify as capital assets in the taxpayer’s hands.
2. Same Asset Type Requirement: The digital asset units being allocated and those receiving the allocation must be of the same type.
3. Recordkeeping Obligations: Taxpayers must maintain detailed records of the total number of remaining asset units in each wallet or account, the number, cost basis, and acquisition dates of unused basis units, and document account (wallet) to account (wallet) transfers and methods used for calculating gains and losses in previous tax years. Detailed recorded keeping for all digital asset transitions is critical and will look different for individual taxpayers versus business taxpayers.
4. Irrevocable Allocations: Once basis allocations are made under the safe harbor, they are binding for all purposes under Section 1012 of the Internal Revenue Code. Taxpayers only have one opportunity to make a reasonable allocation.

Reasonable Allocation Methods

The revenue procedure outlines two primary methods for allocating unused basis:

1. Specific Unit Allocation: Assigning specifically identified units of unused basis to either a pool of remaining digital asset units within each wallet or account, or individual remaining digital asset units within a specific wallet or account.
2. Global Allocation: Assigns units of unused basis using a predefined rule that specifies how the basis units will be ordered and allocated to pools of remaining digital asset units within each wallet or account.

Timing Requirements

Taxpayers must complete basis allocations within the following timelines:

1. Specific Unit Allocations: Completed before the date of the first sale or disposition of the digital asset after January 1, 2025, or the due date (including extensions) of the taxpayer’s return for the tax year including January 1, 2025.
2. Global Allocations: Document the allocation methods in records before January 1, 2025, and finalize allocations by the later of the same dates for specific unit allocations.

Taxpayers are strongly encouraged to establish a separate wallet or account to organize and separately track digital asset units with different cost bases for pre and post January 1, 2025 assets. Without this separation, tracking basis will need to be managed manually, which can be complex and prone to error.

Key Considerations for Taxpayers

• Recordkeeping is Critical: Taxpayers must maintain thorough records to substantiate unused basis, including acquisition dates and original cost basis.
• Irrevocable Elections: Once an allocation is made under this procedure, it cannot be reversed.
• Asset Type Segregation: Each type of digital asset must be treated separately to ensure compliance.
• Audits and Reviews: Basis amounts subject to audit or IRS examination may disqualify corresponding allocations.

The Bottom Line:

Rev. Proc. 2024-28 provides taxpayers holding digital assets with a practical framework to transition to the new IRS rules for basis tracking. By offering flexibility through specific unit and global allocation methods, it addresses potential challenges in reconciling pre-2025 practices with the updated regulations.

However, taxpayers must adhere to strict recordkeeping requirements and timing deadlines to benefit from the safe harbor. This revenue procedure is a pivotal step in ensuring compliance in an increasingly regulated digital asset environment.

Aprio’s Blockchain and Digital Asset team can assist you with digital asset accounting and tax accounting matters. Schedule a general consultation to explore how we can support your needs.