
Accounting Today reported that cryptocurrency accountants have been helping their clients prepare for what they see as a "seismic shift in digital asset reporting" just in time for the safe harbor provision ending in January.
According to Accounting Today, IRS Revenue Procedure 2024-28, released in June, effectively ends the long-established practice of "universal wallet" reporting, where individuals can account for their digital assets, specifically cryptocurrency, as a combined pool. Under the new rules, which take effect in 2025, individuals will be required to report their holdings on an account-by-account basis.
Zach Gordon, founder of cryptocurrency accounting firm Red Five and past NYCPA director-at-large, characterized the shift as "monumental." He said this means "going from the universal wallet concept—which is imperfect without a doubt but something we can handle today—to what is, in essence, specific IDs where every wallet needs to be treated as its own universe for tax purposes." This, Gordon noted, is a big change, and given how a lot of these reporting infrastructures, even on the transactional level, were built, it is not ideal.
To illustrate, Gordon said to consider an entity that runs a trading algorithm that has several microtransactions. Accountants will need to capture all of those transactions, which can amount to millions in a year, trace their paths through specific wallets and identify what is and is not taxable, which, at least theoretically, can be time-consuming.
How easy or hard it is to help a client navigate this shift will mostly depend on their overall due diligence or "wallet hygiene," which can be best conceptualized as maintaining certain habits for the security, privacy and effectiveness of one's accounts, Accounting Today explained. This could cover tracking things such as which wallets serve which purpose, which assets are in the wallets and who has custody and control of them. Although these are usually on a public blockchain and are technically auditable, it will not be easy.
Pat Camuso, founder of digital asset-focused accounting firm Camuso CPA, said that assisting clients in this shift involves tracking and tracing assets by identifying the relevant data and drilling down at the transaction level asset-by-asset. This lets them track fund flow to map the client's accounts, everything in them and what assets are inbound and outbound.
Accounting Today reported that for those already practicing proper wallet hygiene, these engagements will not be too hard to get through. But many do not. Both Gordon and Camuso said that it is common for individuals to forget about a wallet and not know how many they have.
Since the new rules make things more complicated, engagements will become more complex, which will mean taking longer and costing more. However, given the difficulty of navigating the network of assets held by some clients, Camuso said there is not much choice.
To this, he noted that "[You'll need to be] going asset by asset, down a whole list, and ensuring that everything is allocated right. You may have 25 lots of Ethereum and now we have to snapshot your wallets and allocate them appropriately to each wallet, so with that level of complication, yes, that will increase fees." When it comes to ongoing maintenance, "it has always been that tangled mess and fees have always reflected that as a result because there is no way around that."
Gordon added that monitoring these engagements has become harder. Although many CPAs are moving away from the billable hour, he noted that it can at times be hard to determine a fair estimate for this work. However, he is more concerned with timing rather than the economics of the matter, given that there is still much to do and not much time.
"It seems like everything takes way longer," Camuso explained. "There's way more stuff to do and the deeper you get the more challenging it gets to come up with the right answer. It depends on the platform. There's the large institutional ones, and they're going to be okay, they will figure out a way to make sure we're ramped up and ready to go, but there's some of the newer [blockchains] out there. The newer platforms are working hard, but these standards are very hard to maintain."
Camuso said that one problem is that many of the accounting solutions utilized for cryptocurrency have been coded using the universal wallet methodology in mind, and many of these programs have not yet been modified to adapt to the new rules, with only a few exceptions.
Making the challenge worse, while changing from universal wallet to account-by-account reporting is the most eminent new rule, it is not the only one. Another substantial change is first-in-first-out (FIFO) now becoming the default methodology. For years, many cryptocurrency holders were more inclined to use a highest-in-first-out methodology that produced better tax outcomes. Switching to a FIFO default methodology can have tax consequences for individuals who have painstakingly structured their assets the other way, Gordon noted. He added, however, that this will be hard for the IRS to implement and wondered whether it might later permit other methodologies such as last-in-first-out.
Camuso said that this will also require users of multiple wallets to be more careful in structuring their assets.
In terms of the best practices, they have found while helping clients in this situation, both Camuso and Gordon had similar advice. This is to maintain accurate records, both on the part of the client and the firm. Camuso noted that making sure the calculations are accurate up to that point is half the battle, if this is covered, the allocations will not be overly complicated. Meanwhile, Gordon said it is crucial to understand all the wallets involved, which transitions are related to each of them, and ensure records are regularly updated. Preparation, overall, is key. Camuso said it important to impress upon clients that it is much better to do this before the Jan. 1 deadline.