Digital Asset Funds: Are You Compliant with New IRS Regulations?

The IRS has issued new guidance, Rev. Proc. 2024-28, that introduces significant changes to the way digital assets must be tracked and reported. According to the new rule, as of January 1, 2025, each digital asset must be tracked on an individual basis, wallet by wallet or account by account.

You may review the full IRS document here: https://www.irs.gov/pub/irs-drop/rp-24-28.pdf

Summary & Key Points

Starting January 1, 2025, taxpayers can no longer track the basis of their digital assets as if held in a single account or address. Taxpayers who self-custody assets can adopt a standing rule in their records to identify units for sale. IRS Rev. Proc. 2024-28 provides a safe harbor allowing reallocation of unused basis among existing holdings as of January 1, 2025.

End of Universal Wallet Accounting (Multi-Wallet Approach)

The IRS final regulations eliminate the “universal wallet approach” for tracking digital asset basis. Taxpayers must now track basis for each digital asset individually, wallet by wallet or account by account which presents practical challenges, especially for those using multiple addresses or brokers.

Safe Harbor Relief

Rev. Proc. 2024-28 allows taxpayers to reasonably reallocate unused basis among their digital asset holdings as of January 1, 2025. This aims to ease the transition and simplify tax reporting. A taxpayer may make such allocations on a specific unit basis or on a global allocation basis.

Information for NAV Fund Services Clients

NAV Tax and Accounting teams have carefully reviewed the new guidelines, and we can confirm that NAV systems and processes are already fully compatible with these updates and, in fact, were developed using these methods from the outset. No action is required for your fund to be in full compliance with the new IRS regulations.

If you have additional questions or would like to discuss how this change may impact your specific needs, please don’t hesitate to reach out to your Account Manager.

Information for Funds That Self-Administer or Partner with Other Administrators

Non-compliance by the effective date will generate inaccurate reporting of digital assets, leading to increased scrutiny during audits and potentially, significant tax penalties, liabilities, and interest charges. Now is the time to confirm that your internal systems or service provider can handle the reporting requirements necessary to comply with the new rule. If not, NAV Fund Services is uniquely equipped to address the complexities of this new requirement. Our advanced proprietary reporting platform was designed from the outset to track each digital asset individually, wallet by wallet or account by account.

NAV also offers direct API connectivity with 150+ major exchanges and 200+ blockchains, robust technology that facilitates seamless data integration and accurate tracking. Learn more: https://www.navfundservices.com/fund-strategies/digital-assets

If you’re unsure about how this new IRS rule may affect your reporting process or are concerned that your current fund administration solution is inadequate, contact us to discuss how we can support your needs: https://www.navfundservices.com/contact-us