Have you seen a lot of noise on your timeline saying you have to do something by Jan 2025 or else your crypto basis reporting will be messed up?

Guess what: that noise is probably wrong.

BACKGROUND. In June, Treasury issued regs under tax code section 1012 that purport to prohibit taxpayers from using "universal wallet reporting" for dispositions after 2024.

Universal wallet reporting treats a taxpayer as holding all of their crypto in the same place. Under universal wallet reporting, if (for example) a taxpayer sells a portion of their ETH, they can “specifically identify," through a contemporaneous written record, the sale as coming first from their high-basis ETH, even if it's held at a different blockchain address.

The regs limit taxpayers’ ability to specID crypto held at a custodian or in self-custody when they sell through a different custodian. That's consistent with section 1012(c), which requires "account by account" reporting to facilitate 1099 basis reporting by brokers.

TaxTwitter seem to believe the regs also limit spec ID for self-custodied crypto. I think that's wrong.

In fact, I don't know what Treasury thinks the regs do for self-custodied crypto. I'd be comfortable continuing to treat all my self-custodied crypto as held in one place.

THE RULE. Under the regs, if a taxpayer sells less than all units of the same crypto from a single wallet, “the basis and holding period of the units sold, disposed of, or transferred are determined by making a specific identification of the units in the wallet.” Absent a spec ID, the regs treat the taxpayer as disposing of units of crypto in their order of acquisition, regardless of when the taxpayer transferred the crypto to that wallet.

Treasury clearly thinks the regulatory reference to a single wallet is meaningful. The preamble says Treasury has rejected a “universal wallet” approach, and Rev Proc 2024-28 provides safe harbors for transitioning from universal to wallet-by-wallet accounting.

But get this: the regs define a wallet as “a means of storing, electronically or otherwise, a user’s private keys to digital assets held by or for the user.” In other words, notwithstanding its colloquial use to mean "address," a wallet under the regs is a storage method.

So, if a user stores all their private keys on one piece of paper or hardware device, that paper or device is a “wallet” under the regs, and all crypto controlled by the private keys stored there is treated as held in a single pool within which spec ID is permitted.

I'M NOT CRAZY, YOU ARE. You might think Treasury's use of the term "wallet" in the spec ID rule is just a typo. Maybe they really meant to say "address," so that crypto held at one address cannot be spec ID'd when crypto is sold from another address.

But the preamble summarily rejects an address-by-address approach because it “would not conform to the statutory requirements of section 1012(c)(1),” which use the term “account.”

The preamble is right. Section 1012(c)’s account-by-account rule is intended to facilitate basis reporting by brokers. It does not affect reporting conventions for sales of self-custodied assets.

For example, if I buy gold into safe deposit box A and sell gold out of safe deposit box B, section 1012(c) does not prohibit me from spec ID'ing the basis and holding period of the gold in safe deposit box A as having been sold.

Blockchain addresses are virtual safe deposit boxes. Neither are "accounts" under section 1012(c), and Treasury explicitly acknowledges that.

LITERALLY? Maybe we instead try to apply a wallet-by-wallet rule using Treasury's "wallet" definition. But...

• What if I separately record my private keys for half the year and aggregate them for half?

• What if I fragment my keys?

• What is a multisig's "wallet"?

• How would it be appropriate or administrable for the IRS to police my storage methods, anyway?

So I feel okay without literally writing all my private keys on a single piece of paper.

But you do you.

CONCLUSION. The "wallet-by-wallet" rule isn't a rule but a riddle. Unfortunately, that leaves taxpayers in an awkward place, and they likely will take different positions. Hopefully we can get clarity from Treasury in the near future...though they have their hands full.