Basis of Digital Assets Sold Cost Flow Assumptions - IRS Releases Temporary Specific Identification Relief for 2025

To close out 2024, the IRS released Revenue Procedure 2025-7 providing temporary relief provisions for allowing taxpayers to specifically identify specific blocks of digital assets sold from a brokerage account in 2025. This relief is in addition to special rules adopted earlier this year in Revenue Procedure 2024-28 for allocating unallocated basis as taxpayers transition to the provisions of Reg. §1.1012-1(j). The details of all of these rules are described below.

General Rules Under Reg. §1.1012-1(j)

The rules for determining the basis of digital assets under Reg. §1.1012-1(j) depend on whether the assets are held in the custody of a broker or not. The regulation specifies that it applies to all acquisitions and dispositions of digital assets on or after January 1, 2025. Here’s a breakdown of the rules:

Digital Assets Not Held in the Custody of a Broker

  • Specific Identification: If a taxpayer sells, disposes of, or transfers digital assets not held by a broker, they can specifically identify the units being sold if they maintain records that specify the particular units by an identifier such as purchase date and time or the purchase price, no later than the date and time of the transaction. This identification must be recorded in the taxpayer’s books and records. Adequate records must also be maintained to establish that the identified unit was removed from the wallet.
  • First-In, First-Out (FIFO): If a specific identification is not made, the units sold are determined by treating the units as disposed of in order of time from the earliest date the taxpayer acquired the units. The date the units were transferred into the taxpayer’s wallet is disregarded for this purpose.
  • Example: If a taxpayer transfers two lots of a digital asset into an unhosted wallet, and then sells some, they must specifically identify which units are being sold at the time of sale; otherwise, the units will be considered sold in the order they were acquired.

Digital Assets Held in the Custody of a Broker

  • Adequate Identification: If a taxpayer sells, disposes of, or transfers digital assets held by a broker, they can make an adequate identification by specifying to the broker the particular units to be sold by reference to an identifier, such as purchase date and time or purchase price, no later than the date and time of the transaction. The broker must designate the identifier as sufficiently specific. The taxpayer is responsible for maintaining records to substantiate the identification. A standing order or instruction for specific identification is also considered adequate. If a broker only offers one method of specific identification, that method is treated as a standing order or instruction.
  • First-In, First-Out (FIFO): If the taxpayer does not provide an adequate identification to the broker, the units sold are determined by treating the units as disposed of in order of time from the earliest date on which the units were acquired by the taxpayer and held by the broker. The date the units were transferred into the custody of the broker is disregarded for this purpose.
  • Special Rule for Withheld Units: In the case of digital assets exchanged for different digital assets, any units withheld by the broker for backup withholding or transaction costs are deemed to be adequately identified as coming from the units received in the exchange, regardless of any other identification.
  • Example: If a taxpayer has multiple lots of a digital asset held at a broker, and sells some, they must specifically tell the broker which units they want to sell, otherwise, the units will be considered sold in the order they were acquired.

Additional Considerations

  • Method of Identification: The method of specifically identifying digital assets is not considered a method of accounting, and therefore, changes in the method of identification do not require any special accounting treatment.
  • Temporary Relief: For the period between January 1, 2025 and December 31, 2025, there is temporary relief allowing taxpayers to use additional methods for making an adequate identification for digital assets held by a broker, including identifying units on the taxpayer’s books and records, or recording a standing order on the taxpayer’s books and records.[^1]
  • Safe Harbor: Taxpayers may rely on a safe harbor to allocate unused basis of digital assets to their digital asset wallets or accounts as of January 1, 2025, if they meet certain requirements. This safe harbor is intended to help taxpayers transition to the new rules.[^2] These rules provide a framework for determining the basis and holding period of digital assets for tax purposes, with specific rules for assets held by brokers and those held directly by the taxpayer.

How Does Revenue Procedure 2024-28 Impact Basis Identification Under Reg. §1.1012-1(j)

Rev. Proc. 2024-28 provides a safe harbor that taxpayers can use to allocate the basis of digital assets to specific wallets or accounts as of January 1, 2025. This is relevant to the basis identification rules under Reg. §1.1012-1(j) because it addresses how taxpayers should transition to the new rules which require basis to be determined on an account-by-account basis, rather than using a universal or multi-wallet approach. Here’s how Rev. Proc. 2024-28 impacts the basis identification rules under Reg. §1.1012-1(j):

  • Transition from Universal Basis Tracking: Prior to the final regulations, some taxpayers interpreted IRS guidance as permitting a universal or multi-wallet approach to basis identification. This meant that taxpayers could track the basis of their digital assets across multiple wallets as one large pool. However, the new regulations require basis to be tracked on an account-by-account basis. Rev. Proc. 2024-28 helps taxpayers transition from this universal approach to the new account-by-account basis tracking.
  • Safe Harbor for Allocating Unused Basis: The revenue procedure provides a safe harbor allowing taxpayers to allocate units of unused basis to digital assets held within each wallet or account as of January 1, 2025. A “unit of unused basis” refers to the original cost basis of a digital asset unit that has not yet been used in a transaction. The allocation must be reasonable and is done to ensure that as of January 1, 2025, each wallet or account has the correct basis associated with its digital assets.
  • Specific Unit Allocation vs. Global Allocation: Taxpayers can choose to allocate their unused basis either through specific unit allocation, where they assign particular units of unused basis to specific digital assets or pools of assets within a wallet, or through global allocation, where a rule is used to order and allocate the units of unused basis to digital assets in each wallet or account.
    • A specific unit allocation is complete when the taxpayer’s books and records first record the specific characteristics of the units of unused basis allocated to each pool of digital assets in the taxpayer’s wallets or accounts on a wallet-by-wallet or account-by-account basis.
    • A global allocation is complete when the taxpayer’s books and records first record the specific characteristics of the units of unused basis allocated to each pool of digital assets in the taxpayer’s wallets or accounts on a wallet-by-wallet or account-by-account basis.
  • Timing for Allocations:
    • Taxpayers using a specific unit allocation must complete the allocations before the earlier of the first sale of a digital asset on or after January 1, 2025, or the due date (including extensions) of the taxpayer’s 2025 tax return.
    • Taxpayers using a global allocation must describe their method in their records before January 1, 2025, and complete the allocations before the later of the first sale of a digital asset on or after January 1, 2025, or the due date (including extensions) of the 2025 tax return.
  • Requirements for the Safe Harbor: To use the safe harbor, a taxpayer must:
    • Hold remaining digital asset units as of January 1, 2025.
    • Have units of unused basis as of January 1, 2025.
    • Be able to identify and maintain records showing the total number of remaining digital asset units in each wallet or account.
    • Be able to identify and maintain records showing the number of units of unused basis, the original cost basis, and the acquisition date of the digital asset unit to which the unused basis was originally attached.
    • Treat any allocation as irrevocable.
  • Relationship to §1.1012-1(j): The safe harbor under Rev. Proc. 2024-28 applies to digital assets held before January 1, 2025, to help with the transition to the new rules under §1.1012-1(j). The rules in §1.1012-1(j) generally apply to digital assets acquired or transferred on or after January 1, 2025.
  • Standing Orders: Taxpayers making a global allocation must use standing orders to identify which digital assets are sold if the sale takes place after January 1, 2025, but before the global allocation is completed. After the global allocation is complete, the taxpayer may make specific identifications of units sold or transferred, in accordance with Reg. §1.1012-1(j).
  • Not for Determining Amount of Basis: The safe harbor does not apply to the calculation of the amount of unused basis, which must be substantiated separately.
  • Examples: The revenue procedure provides several examples to illustrate how the safe harbor works. For example, it shows how to allocate the unused basis when a taxpayer has multiple wallets and has sold some digital assets before January 1, 2025. In summary, Rev. Proc. 2024-28 provides a transitional safe harbor to allocate basis to specific wallets or accounts that taxpayers can use to comply with the new basis tracking requirements of Reg. §1.1012-1(j), which mandates account-by-account basis determination for digital assets starting January 1, 2025.

What Relief is Offered by Revenue Procedure 2025-7?

Rev. Proc. 2025-7 provides temporary relief for taxpayers regarding the identification of digital asset units held in the custody of a broker, and it impacts the basis identification rules under Reg. §1.1012-1(j) and the transitional guidance in Rev. Proc. 2024-28. This temporary relief is specifically for the period between January 1, 2025, and December 31, 2025. Here’s how Rev. Proc. 2025-7 interacts with the basis identification rules:

  • Temporary Relief for Broker-Custodied Digital Assets: The primary purpose of Rev. Proc. 2025-7 is to provide temporary alternative methods for taxpayers to make an adequate identification of digital asset units held by a broker, as required by § 1.1012-1(j)(3)(ii). This is because some brokers may not have the technology in place by January 1, 2025, to accept specific instructions from taxpayers for identifying which units are being sold.
  • Alternative Methods for Adequate Identification: During the relief period, taxpayers can make an adequate identification of digital asset units held in the custody of a broker by either:
    • Identifying the specific units to be sold, disposed of, or transferred in their own books and records, by referencing identifiers such as purchase date and time or purchase price, no later than the date and time of the transaction.
    • Recording a standing order in their books and records that includes sufficient information to identify the units, as long as it is entered before the units are sold.
  • Non-Application of the One-Method Rule: During the relief period, the rule in § 1.1012-1(j)(3)(ii) that treats taxpayers as having made a standing order when their broker only offers one method of specific identification does not apply if the taxpayer uses the methods in Rev. Proc. 2025-7.
  • No Impact on Non-Custodied Assets: The temporary relief provided by this notice does not apply to digital asset units that are not held in the custody of a broker. These assets are still subject to the rules of § 1.1012-1(j)(1) and (2).
  • Interaction with Rev. Proc. 2024-28: Taxpayers using the safe harbor provided by Rev. Proc. 2024-28 to allocate basis to digital assets across wallets or accounts as of January 1, 2025, may also rely on the temporary relief provided in Rev. Proc. 2025-7, once the requirements of Rev. Proc. 2024-28 are satisfied. The temporary relief does not affect the safe harbor described in Rev. Proc. 2024-28.
  • No Change to §1.6045-1 Rules: The temporary relief described in Rev. Proc. 2025-7 does not apply to the § 1.6045-1 rules for digital assets.
  • Compliance with § 1.1012-1(j)(3)(ii): The temporary relief does not prohibit taxpayers from complying with § 1.1012-1(j)(3)(ii) as originally prescribed.
  • Specific Identification Method: The method of specifically identifying the units of a digital asset is not a method of accounting under section 446 or 481. In summary, Rev. Proc. 2025-7 provides a temporary workaround for taxpayers to identify which digital assets they are selling, disposing of, or transferring, when those assets are held by a broker, and when the broker does not yet have the technology to accept specific instructions. This temporary relief allows taxpayers to use their own books and records or standing orders to identify their digital assets when determining their basis. The temporary relief only applies to assets held by brokers, and only during the 2025 calendar year. The safe harbor under Rev. Proc 2024-28 can be used with this temporary relief.

Analysis of these documents was prepared with assistance from NotebookLM.

[^1]: Rev. Proc. 2025-7

[^2]: Rev. Proc. 2024-28