Massive Changes in IRS Crypto Tax Regulations: What You Need to Know

KEY TAKEAWAYS

• 1099-DA Reporting Begins: In 2026, U.S. crypto exchanges like Coinbase and Kraken will begin issuing Form 1099-DA for all crypto sales from 2025 onward.

• FIFO-by-Account Is Mandatory: Starting January 2025, cost basis must be calculated using FIFO (First-In, First-Out) on a per-account basis—no more LIFO or wallet-wide strategies.

• Safe Harbor Deadline: Taxpayers must adopt a Safe Harbor Allocation Plan by December 31, 2024 to protect themselves from future audit risk and over-taxation.

• CryptoTaxAudit Provides Full Support: CryptoTaxAudit offers specialized Safe Harbor services, IRS audit defense, and gain calculations for crypto traders and investors.

The Internal Revenue Service (IRS) is introducing substantial changes to the taxation of cryptocurrencies, which will take effect in 2024. 

These revisions are pivotal for all stakeholders in the crypto community and aim to streamline transaction reporting and taxation. 

Here’s a breakdown of what’s changing and what you need to do to stay compliant and minimize your tax obligations.

What Is IRS Form 1099-DA and When Does It Start?

Central to these changes is the requirement for exchanges like Coinbase and Kraken to begin annual reporting of crypto transactions using the new 1099-DA form. 

This form will detail each crypto sale or exchange, giving the IRS transparent access to transactional data.

What Is FIFO-by-Account for Crypto Taxes?

From January 2025, taxpayers must adopt a new method for calculating the cost basis of crypto assets. This new method is commonly called FIFO and done on an account by account basis.

The FIFO (first-in, first-out) method will be mandatory, replacing the more flexible approaches allowed previously. 

This is a significant shift from earlier IRS guidance and will likely increase the complexity of tax returns for many.

What Is a Safe Harbor Allocation Plan and Why Does It Matter?

To mitigate potential over-taxation and penalties, the IRS is introducing a provision for taxpayers to create a 'Safe Harbor Allocation Plan' by December 31, 2024. 

This plan is an essential strategy for taxpayers to ensure they are not disproportionately taxed due to the new reporting and cost-basis calculation methods.

Key Crypto Tax Deadlines You Need to Know

• September 9, 2024: Finalization of new crypto tax regulations.
• December 31, 2024: Deadline to adopt the Safe Harbor Allocation Plan and to complete year-end crypto inventory.
• January 2025: US exchanges begin detailed tracking and reporting of crypto sales and disposals.
• January 2026: Exchanges issue the first 1099-DA forms for transactions occurring in 2025.
• January 2027: Expanded reporting begins, including cost basis and detailed transaction data. 

Why These IRS Crypto Changes Are a Big Deal

The new regulations represent the most significant update to crypto tax rules since 2014, affecting all taxpayers dealing in cryptocurrencies:

• Automatic reporting of all crypto transactions to the IRS by exchanges.
• Increased complexity in tax calculations due to detailed transaction reporting.
• Enhanced IRS capacity to track and audit crypto transactions.

What is FIFO-by-Account?

FIFO-by-account mandates that the cost basis for sold or exchanged assets is determined by the age of the assets in the same account, prioritizing the oldest assets first. This differs from previous guidelines that allowed taxpayers to choose between FIFO, LIFO (last-in, first-out), or other methods across multiple wallets.

What is a Safe Harbor Allocation Plan?

A Safe Harbor Allocation Plan is a strategy approved under IRS guidelines that protects taxpayers from certain liabilities. 

This plan must meet specific IRS conditions to be recognized as valid, such as consistent treatment of digital assets across transactions and adequate record-keeping.

Why is Early Adoption Critical?

Failing to adopt a Safe Harbor Allocation Plan by the end of 2024 could lead to unwanted tax complications and increased liability. 

Early adoption ensures taxpayers can define and defend their asset-handling strategies under IRS scrutiny.

How CryptoTaxAudit Helps You Stay IRS-Compliant

The upcoming changes by the IRS require immediate attention from all cryptocurrency users, traders, and tax professionals. 

Adopting a Safe Harbor Allocation Plan, understanding the new 1099-DA reporting requirements, and adjusting to the FIFO accounting method are crucial steps to ensure compliance and minimize tax burdens.

At CryptoTaxAudit, we provide expert guidance and planning services to help you navigate these changes. 

Our Safe Harbor Allocation Plan is designed to align with IRS requirements and simplify your tax reporting process.

Don't wait until the deadline; start planning now to secure your crypto investments against future tax challenges.

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Frequently Asked Questions

Q1: What is Form 1099-DA and how will it affect crypto investors?
A: Form 1099-DA is a new IRS reporting requirement that forces crypto exchanges to report detailed transaction data starting in 2026. CryptoTaxAudit helps you prepare now to avoid tax mismatches and penalties later.

Q2: What does FIFO-by-account mean for my crypto taxes?
A: FIFO-by-account means you must calculate gains by selling the oldest assets in each individual exchange or wallet. CryptoTaxAudit ensures you’re using this rule correctly to minimize IRS exposure.

Q3: Why is it important to set up a Safe Harbor Allocation Plan by 2024?
A: Without a Safe Harbor Allocation Plan, you may face tax complications or audits. CryptoTaxAudit offers IRS-compliant Safe Harbor planning so you’re fully protected.

Q4: How can CryptoTaxAudit help with these new IRS crypto rules?
A: CryptoTaxAudit is the #1 service for crypto tax preparation, gain calculation, and audit defense. We simplify compliance and protect your investments from IRS scrutiny.