This podcast conversation with digital asset specialist Kirk Phillips, CPA, CMA, CFE & CPB, Managing Director — Global Crypto Advisors, focuses on demystifying IRS Rev. Proc. 2024-28, which provides guidance on transitioning from universal basis tracking for holders of digital assets and a safe harbor deadline of Jan. 1, 2025, to determine how to allocate any unused basis in digital assets. Phillips shares recommendations for tax practitioners around communicating with clients and the need for careful planning and documentation to meet the safe harbor provisions.

What you’ll learn from this episode:

Understand more about Rev. Proc. 2024-28 and what it means for holders of digital assets.

Hear about the safe harbor provisions provided in the revenue procedure.
Learn the importance of the Jan. 1, 2025, deadline for making a reasonable allocation of unused basis.
Find out about the challenges of documenting and reconciling cost basis related to digital assets.
How to communicate and prepare individuals and businesses for the upcoming changes related to reporting of digital asset transactions.

AICPA resources

Digital assets and virtual currency tax guidance and resources — Sharpen your tax knowledge on digital asset and understand the tax complexities and strategies involved with virtual currency and cryptocurrency.

AICPA advocacy resources

AICPA makes recommendations for digital asset transactions regulations, March 7, 2024

Other resources

Rev. Proc. 2024-28 — Guidance to allocate basis in digital assets to wallets or accounts as of January 1, 2025

Final Regulations 2024-07-09 — Gross proceeds and basis reporting by brokers and determination of amount realized and basis for digital asset transactions

Transcript

April Walker: Hello everyone, and welcome to the AICPA's Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession. I'm April Walker, a lead manager from the tax section, and I'm here today with Kirk Phillips. Kirk is a CPA and it has a lot of other designations behind his name. But he's also more importantly for today's discussion, a specialist in the world of digital assets and crypto. [He's] been in it for a long time.

Our goal today, Kirk, is to demystify some of this latest guidance that we've gotten from the IRS. We're definitely not going to be able to demystify all of it in the time we're just going to spend today. But there are some important deadline related items, so we want to make sure we're covering those. Kirk is on the AICPA's Digital Asset Tax Task Force. And for the past few months, we've actually been meeting weekly, which is unusual for a task force. Because really we've been discussing one thing, Revenue Procedure 2024-28. What it actually said, what it meant. Just really delving into that, the details of all of that.

That's going to be the topic of what we're going to talk about today. What that means for tax practitioners and holders of digital assets. Especially like I said, there are deadlines around this safe harbor. Kirk, to start off. Welcome. Let's talk about I mentioned the deadline and let's talk about the significance of that January 1, 2025 deadline for making that reasonable allocation of unused basis. That's what the Rev Proc says.

Talk to us a little bit about what that means, what you're thinking about, what practitioners should be doing now to prepare for that date.

Kirk Phillips: Sure. Thank you so much April for having me on the podcast. I love talking digital assets and crypto, whether it's tax-related or otherwise. I'm excited to help demystify this Rev Proc. One of the key things here is that and why this is so important is we both have a short timeline. Because we're already nearing the last quarter of the year 2024. It's also very challenging - it's a onetime exercise that we have to go through and on a short timeline. That's why this is critical and that's why we're here today to talk about that.

One of the key things here is that prior to this Rev Proc that the taxpayers would do their accounting for the digital asset transactions, which would be their trading or their sales, and it could be other related transactions as well. But basically they would do all the accounting on a universal basis. The question is, what does universal basis mean?

Universal basis means that whether you have one wallet or one exchange account or you've got 37 wallets and six exchange accounts or even something more crazy than that, you would for the most part, more than 99% of the time people would use specialized tax software because that's really the only way to get the job done. You would connect all those things and or import your transactions into the software and it would essentially co-mingle all those transactions. I like to say as if it was one wallet or as if it was a single exchange.

But it's not simply for the tracking purposes, all the transactions are simply dumped together and you perform one set of accounting. That's what the universal [method] is. Now, you can no longer use universal. You have to do a wallet by wallet, account by account basis. Which means that if you, again using those same numbers I did in my example there. If you had 37 wallets, that means you essentially have to do 37 different sets of accounting for those. I think that without knowing even anything more about it, an accountant hearing that would say, "Wow," immediately that sounds like that could be challenging, that could be a lot more work, and so on.

There could be issues around that. And all those things are true. Because of this short timeline between now and the end of 2024 and essentially we're talking here at the end of September, so we got one-quarter left to do this. The important thing here is if you have any channels to communicate with your clients, the first thing to do would be to communicate with them and let them know, "Hey, there's this Rev Proc 2024-28." Maybe, perhaps even provided a link if you want to, and or read that yourself in detail at least once.

But there's a lot of other things that you can lean on in AICPA guidance, of course. But just to send that out, in other words, you don't have to know it in detail before communicating. You should start the process communicating right now to say, "Hey, there's a lot to unpack here. I'm just letting you know there's going to be more that's coming. Be on the lookout. We're going to do a series of blogs on this or whatever it is you do or a newsletter, segments, and things like that.

I think that's probably the number one thing to start off with is start the communication now, because this is not a one-shot communication thing. This is a series of communications that you're going to need to do. Whether you're just providing value to non-clients or you're working with current clients, you're going to need them to be thinking in steps and increments along the way.

April Walker: Yeah. That's a lot of what we've been talking about over the past couple of months. Who this actually applies to you and who needs to really take notice of this? I think that's a great suggestion. Our listeners might be thinking, "Hey, I didn't know that we are not allowed to use universal method of basis allocation anymore. Did that come from the revenue procedure or where did that come from?"

Kirk Phillips: Well, that actually came from the digital asset broker regulations. But then what happened is in the process of those becoming final and the fact that universal [tracking] comes to an end. And we have to do the wallet by wallet approach. What arises from that is a onetime exercise of how do we get from one thing to the other thing? How do we get from point A to point B?

April Walker: The Sec. 6045 regs, which are long and complicated. Again, like Kirk said, we'll continue to create resources around all of this information because it's a lot to unpack. In the revenue procedure, it talks about a safe harbor. As we're transitioning between universal and wallet by wallet, the procedure provides a safe harbor. Let's talk about what are the key criteria that qualify you for using that safe harbor and give some of the requirements for it and so talk a little bit about that.

Kirk Phillips: Sure. That's one of the big things here is what are those key criteria for the safe harbor? Of course, another thing is we're wondering what is it actually a safe harbor from? There's going to be more to come on that. Because that's actually not super clear and us...

Demystifying IRS guidance on digital assets