A Tax Lawyer Explains The New Safe Harbour Rules in 2025

Hey it’s James from Crypto Tax Calculator here.

I’ve seen tons of questions about the new Safe Harbour rules popping up so I asked our Head of Tax to put together a bit of a guide for you to help clear everything up.

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The IRS has introduced Rev. Proc. 2024-28, which includes safe harbor provisions to help us transition from a universal/global tax reporting method to a per-wallet method starting January 1, 2025.

Let me break it down in simple terms so everyone can understand and prepare accordingly.

What’s Changing?

Starting January 1, 2025, the IRS wants us to report our crypto taxes on a per-wallet basis instead of lumping everything together.

To make this switch smoother, they've provided some safe harbor rules. Think of safe harbor as a set of guidelines that, if you follow them, the IRS will consider your tax reporting to be compliant.

What crypto is affected?

• Only for Crypto Acquired Before 2025: This safe harbor applies to any digital assets (like Bitcoin, Ethereum, etc.) you bought before January 1, 2025 and still hold on that date.
• Excludes New Acquisitions: Any crypto you buy or transfer on or after January 1, 2025 won’t be covered by these rules.

What Do You Need to Do?

To qualify for the safe harbor, you need to:

1. Ensure Capital Asset Status:
   
   • Each crypto unit you hold must be considered a capital asset (similar to stocks or bonds).
   • The original cost basis (what you paid for it) must have been tied to a crypto unit that was a capital asset.
2. Same Type Requirement:
   
   • When you allocate any unused basis (leftover cost basis from selling some crypto), it must go to another crypto of the same type. For example, leftover basis from Bitcoin can only go to another Bitcoin, not Ethereum.
3. Keep Detailed Records:
   
   • Track how many crypto units you have in each wallet.
   • Note how much of the cost basis is left over.
   • Record the original purchase price and the date you bought each crypto unit.

How to Allocate Unused Basis?

You have two main ways to allocate your unused basis:

1. Specific Unit Allocation:

   • Assign Specific Coins: Decide exactly which leftover basis goes to which remaining crypto unit in a specific wallet.
   • Pool Allocation: Group your remaining crypto in each wallet and allocate the unused basis to the whole group.

2. Global Allocation:

   • Predefined Rules: Use a set rule to decide how to spread out the unused basis across all your wallets and crypto units.

When to Do It?

• Specific Unit Allocation: Must be done before:
  
  • You sell, dispose of, or transfer the same type of crypto after January 1, 2025.
  • The tax filing deadline (including extensions) for the year that includes January 1, 2025.
• Global Allocation: You need to:
  
  • Describe your allocation method in your records before January 1, 2025.
  • Complete the allocation by the same deadlines as specific unit allocations.

What Should You Do Next?

1. Review Your Holdings: Look at all the crypto you own before January 1, 2025.
2. Choose an Allocation Method: Decide between specific unit allocation or global allocation based on what works best for you.
3. Keep Good Records: Make sure you have detailed records of all your crypto transactions, including purchase dates, amounts, and cost basis.
4. Use Tax Software: Consider using tools like Crypto Tax Calculator to help manage and allocate your cost basis accurately.
5. Consult a Tax Professional: If you’re unsure about any steps, it’s a good idea to talk to a tax expert who’s familiar with crypto taxes.

Got questions or need help with your crypto taxes? Drop them below, and we will do our best to answer them (keep in mind that we may be slow to respond over the holiday break!).

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