Tax regulations concerning digital assets and cryptocurrencies operate independently of Generally Accepted Accounting Principles (GAAP) in the U.S. A significant distinction exists: while current accounting standards generally require companies to adjust digital assets and crypto based on their fair market value, tax regulations only permit this treatment if dealers or traders of specific digital assets opt to mark their holdings to market value. Typically, for tax purposes, profit or loss is acknowledged only when a digital asset is utilized, sold, or exchanged. In the U.S., taxpayers can pinpoint particular units of digital assets involved in a transaction, sale, or disposal. Should a timely and accurate identification of the asset be lacking, the taxpayer will be treated as having disposed of the earliest units acquired.
So, how can a fungible digital asset like Bitcoin be specifically identified? Industry practices have varied; however, in June 2024, the U.S. Treasury, in collaboration with the IRS, released guidelines addressing specific identification when selling, disposing of, exchanging, or transferring digital assets.
For digital assets that are self-custodied (e.g., held in an unhosted wallet), the company must meticulously record in its financial books the specific units intended for sale, disposal, or transfer. This should be done with identifiers such as the purchase date, time, price, or other indicators to definitively distinguish the assets. Companies must keep thorough records of asset locations (e.g., wallet or address) to properly identify specific digital assets or tax lots, even if they are commingled with other fungible assets within the same location. This identification must be performed before the transaction, and the digital assets must be moved from the correct location.
For digital assets held by a broker, exchange, or custodian, the specific identification requirements are akin to those described above. The company needs to maintain a detailed digital asset inventory within its books and records, tracking units or tax lots by account, along with pertinent tax lot identifiers like acquisition dates and tax basis. When a company decides to use, sell, or exchange an asset, it must inform the broker of the asset’s details or the specific tax lot intended for use before the transaction occurs. This communication should clearly identify the units by referencing an appropriate identifier (like the acquisition date) that the broker considers sufficient for distinguishing the particular asset.
The actual transaction process, as relevant to a particular broker, account, or wallet, must adhere to the specifics used in the identification. It’s explicitly stated that if the specific unit or tax lot isn’t appropriately and promptly identified, transactions will be treated on a First-In, First-Out (FIFO) basis.
While these new rules provide clarity, they also present practical difficulties. The U.S. Treasury noted in the rule preamble the requirement to identify assets before a transaction. The guidelines differ from those applicable to traditional securities, where settlement might take one or two days compared to the near real-time settlement of digital assets. Companies with high transaction volumes might find providing the level of documentation and communication required for specific identification burdensome. These entities should consider implementing standing instructions (e.g., using the most recently acquired assets). Standing instructions are permitted for both self-custody and broker-held assets. Alongside the regulations, the IRS issued Revenue Procedure 2024-28, allowing taxpayers to reattribute unused digital asset basis as of January 1, 2025. Taxpayers must meet the Rev. Proc.’s documentation requirements and record the reattribution by January 1, 2025, prior to any digital asset transactions in 2025, or before filing their 2025 tax return. For comprehensive details on these regulations, refer to our Tax Alert.
Typically, from a tax perspective, digital assets held for investment are regarded as capital assets. In corporate contexts, capital losses can only offset capital gains. Consequently, while a company might revalue crypto assets at fair value, with changes reflected in earnings for accounting purposes, tax treatment doesn’t align with this methodology (except under limited circumstances involving an election to mark to market as a digital asset dealer or trader). Instead, a deferred tax asset is layered in, potentially necessitating a valuation allowance if no other sources of capital gains exist. So, how does this translate into financial statements? Members of a company’s tax department should adhere to US GAAP rules and framework initially, subsequently layering on the tax treatment concerning deferred taxes.
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