The world of cryptocurrency is undergoing a transformative shift—not just in technology and adoption, but in regulation. As digital assets become increasingly integrated into mainstream finance, tax authorities are stepping up oversight. Starting January 1, 2025, new U.S. tax reporting requirements will reshape how cryptocurrency transactions are tracked, reported, and taxed. These changes aim to improve transparency, reduce non-compliance, and align digital assets more closely with traditional financial instruments.
For crypto investors, businesses, and brokers, understanding these new rules is essential to staying compliant and avoiding costly penalties. Let’s explore the evolving landscape of cryptocurrency taxation, the key regulatory shifts taking effect in 2025, and what they mean for your portfolio.
The Tax Complexity of Cryptocurrency Before 2025
Prior to 2025, calculating taxes on cryptocurrency was a fragmented and often overwhelming process. Unlike stocks or bonds, which come with standardized tax reporting (like Form 1099-B), crypto investors had no official reporting mechanism from exchanges or custodians. This meant individuals were solely responsible for tracking every transaction—purchases, sales, trades, staking rewards, airdrops, and more—across multiple wallets and platforms.
To manage this complexity, many taxpayers turned to crypto tax aggregators. These tools pulled data from various exchanges and wallets, applied tax methodologies like FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or HIFO (Highest-In, First-Out), and generated tax reports. While helpful, these tools were only as accurate as the data provided—and often struggled with cross-platform tracking or complex DeFi activities.
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The IRS attempted to enforce compliance through measures like the now-removed question on Form 1040: “Did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” While this raised awareness, it did little to ensure accurate reporting. Without standardized reporting from brokers, underreporting and errors remained widespread.
New Reporting Requirements and Broker Obligations in 2025
A major shift arrives on January 1, 2025, when new regulations require crypto brokers—including exchanges and custodial platforms—to report cryptocurrency transactions directly to the IRS using Form 1099-DA (Digital Assets). This form will function similarly to Form 1099-B for stocks but is tailored to the unique nature of digital assets.
Under this rule, brokers must report:
- Gross proceeds from the sale or exchange of digital assets
- The cost basis of the assets sold
- The resulting capital gain or loss
- Holding period information
This change brings cryptocurrency in line with traditional securities and significantly reduces the burden on individual taxpayers. Instead of manually compiling years of transaction history, investors will receive official tax documents summarizing their taxable events.
However, challenges remain—especially for users who transact across multiple non-custodial wallets or decentralized platforms. Since only regulated brokers are required to issue Form 1099-DA, peer-to-peer transactions or self-custodied trades may still require manual tracking.
The Shift to “Wallet-by-Wallet” Allocation of Basis
One of the most impactful changes in 2025 is the wallet-by-wallet cost basis allocation rule. Previously, many investors treated all units of a given cryptocurrency (e.g., Bitcoin) as fungible across all wallets—allowing them to use a blended or average cost basis.
Now, taxpayers must track the cost basis separately for each wallet or account. This means that Bitcoin purchased in Wallet A cannot be automatically combined with Bitcoin in Wallet B for tax purposes. Each wallet maintains its own pool of tax lots.
While this increases accuracy in gain/loss calculations, it also demands far more meticulous record-keeping. Transfers between wallets must be carefully documented to avoid misallocating basis.
IRS Safe Harbor for Basis Allocation
Recognizing the practical difficulties of implementing wallet-by-wallet tracking—especially for those who haven’t maintained granular records—the IRS introduced Revenue Procedure 2024-28, offering a safe harbor for basis allocation.
Under this provision, taxpayers can simplify basis tracking if they meet these conditions:
- All digital assets involved are capital assets
- The unused basis comes from a capital asset of the same type
The taxpayer maintains sufficient records showing:
- Total remaining units per wallet
- Number of units with unused basis
- Original cost basis and acquisition date of those units
- Any allocation made under this procedure is irrevocable
This safe harbor provides critical flexibility for investors transitioning into the new system, especially those who used FIFO or average cost methods in prior years.
Specific Identification Methodology: A Powerful Tool
The IRS continues to allow specific identification—a method that lets taxpayers choose exactly which units of cryptocurrency are sold, along with their associated cost basis and holding period.
This is particularly valuable for tax optimization, as it allows investors to:
- Minimize capital gains by selling high-basis lots
- Harvest losses strategically
- Manage short-term vs. long-term capital gains
Under the new rules, specific identification remains permitted—but requires enhanced documentation. Taxpayers must now prove their selection was made before or at the time of sale, with clear records supporting their choice.
Temporary Relief for Specific Identification in 2025
Acknowledging that many brokers aren’t yet equipped to support real-time specific identification orders, the IRS issued Notice 2025-7, offering temporary relief for the 2025 tax year.
During this period, taxpayers can satisfy specific identification requirements by:
- Maintaining detailed internal records (e.g., spreadsheets or tax software logs)
- Documenting the exact units intended for sale before the transaction occurs
- Notifying their broker is not required for compliance
This grace period gives investors time to adapt while encouraging brokers to build better tools for future tax years.
Frequently Asked Questions (FAQ)
Q: What is Form 1099-DA?
A: Form 1099-DA is a new IRS form that crypto brokers must issue to report digital asset transactions, including proceeds, cost basis, and capital gains or losses. It becomes effective for the 2025 tax year.
Q: Do I need to report crypto transactions if I didn’t use an exchange?
A: Yes. Transactions on decentralized platforms or peer-to-peer trades are still taxable. You’re responsible for tracking and reporting them if no broker issues a 1099-DA.
Q: Can I still use FIFO for my crypto taxes in 2025?
A: Yes, but only within each wallet. You can no longer blend cost basis across wallets unless you qualify for the IRS safe harbor.
Q: What happens if I don’t comply with wallet-by-wallet basis tracking?
A: You risk inaccurate tax reporting, which could lead to audits, penalties, or interest on unpaid taxes.
Q: How can I prepare for the new crypto tax rules?
A: Start by organizing your transaction history, categorizing assets by wallet, and using reliable tax software. Consider consulting a tax professional familiar with digital assets.
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Key Takeaways and Next Steps
The 2025 cryptocurrency tax reforms mark a turning point in regulatory oversight. With Form 1099-DA, wallet-by-wallet basis tracking, and enhanced reporting obligations, the IRS is closing loopholes and demanding greater accountability.
To stay compliant:
- Use crypto tax software that supports specific identification and multi-wallet tracking
- Keep detailed records of all transactions, including transfers between wallets
- Take advantage of the IRS safe harbor if you lack perfect historical data
- Prepare for future years by working with brokers that support advanced tax features
As the crypto ecosystem matures, so too must our approach to financial responsibility. By embracing these changes early, investors can reduce risk, optimize tax outcomes, and participate confidently in the digital economy.
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