Wallet-by-wallet basis tracking is now the governing framework, and for many taxpayers, the limited remaining window under the Rev. Proc. 2024-28 transition safe harbor is rapidly closing.
Even when a Form 1099-DA shows basis, that figure may not reflect the specific units treated as sold under the permanent wallet-by-wallet identification rules.
Many active holders move assets between exchanges, into self-custody, or onto hardware wallets. Beginning in 2025, the basis of those assets must be tracked on a wallet-by-wallet or account-by-account basis. The one-time transition allocation under Revenue Procedure (Rev. Proc.) 2024-28 offered a limited window to assign unused basis among wallets and accounts. For a specific unit allocation, that window closes on the earlier of (1) a taxpayer’s first sale, disposition, or transfer of that type of digital asset after 2024 or (2) the due date, including extensions, of the 2025 return. For a global allocation, the method had to be described in the taxpayer’s books and records before January 1, 2025, and the allocation must be completed before the later of those dates. For most calendar year (CY) individual taxpayers with a valid extension, both allocation deadlines are October 15, 2026.
Consider a CY individual who obtained a valid extension for the 2025 return. The investor acquired both Ether and bitcoin between 2019 and 2024 and held them across an exchange and a hardware wallet. In 2025, the investor sold a portion of the Ether without first completing a Rev. Proc. 2024-28 allocation and without having described a global allocation method in books and records before January 1, 2025. Assume the investor also made no specific identification of the Ether units sold. Because that was the first disposition of Ether after 2024, the safe harbor is no longer available for any of the investor’s Ether (however, since the safe harbor applies separately to each type of digital asset, the Ether disposition itself does not foreclose the safe harbor for the investor’s bitcoin).
Since no specific identification was made, the Ether sold in 2025 defaults to first-in, first-out (FIFO) within the relevant wallet or account. Going forward, the investor may still specifically identify units, but the basis of the Ether remaining in each wallet or account must now be established from underlying acquisition records rather than a safe harbor allocation, and every future sale of Ether from those wallets and accounts depends on that same reconstruction.
Our first article in this series, “Form 1099-DA Changes the Digital Asset Tax Conversation,” examined the related problem of Form 1099-DA reporting that often provides proceeds without usable basis. This article turns to the practical solution: what wallet-by-wallet readiness looks like and how to build records that will hold up going forward.
From Proceeds Reporting to Wallet-by-Wallet Basis Tracking
Final regulations under Internal Revenue Code (IRC) Section 1012 require basis to be tracked on a wallet-by-wallet or account-by-account basis for digital asset acquisitions and dispositions occurring on or after January 1, 2025. The statutory foundation is §1012(c)(1), which provides that “in the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.” Section 1012(c)(3) provides that the terms “specified security” and “applicable date” have the meaning given those terms in §6045(g). The Infrastructure Investment and Jobs Act (IIJA) added digital assets to the definition of “specified security” in §6045(g)(3)(B) and established January 1, 2023 as the applicable date for digital assets under §6045(g)(3)(C). The final regulations implementing the account-by-account convention for digital assets, however, apply to acquisitions and dispositions occurring on or after January 1, 2025.
Treasury Regulation (Treas. Reg.) §1.1012-1(j) implements that account-by-account mandate for digital assets at the operational level. It sets the ordering rules for determining which units of a digital asset are treated as sold, disposed of, or transferred when a taxpayer holds multiple units of the same asset, acquired on different dates or at different prices, within a single wallet or account, and it applies different rules depending on whether those units sit in a broker’s custody or the taxpayer’s own. For broker-custodied units, §1.1012-1(j)(3)(ii) provides that an adequate identification occurs if, “no later than the date and time of the sale, disposition, or transfer, the taxpayer specifies to the broker having custody of the digital assets the particular units of the digital asset to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or purchase price, that the broker designates as sufficiently specific to identify the units sold, disposed of, or transferred.”
This framework replaces the universal or multiwallet approach previously used by many taxpayers and tax software providers, under which units of the same digital asset could sit in a single aggregate basis pool regardless of which wallet or account actually held them. See Rev. Proc. 2024-28 (noting that comments on the proposed 2023 regulations indicated many taxpayers had interpreted FAQs 39 through 41 as permitting a universal or multiwallet approach and providing a transition safe harbor to the new wallet-by-wallet rules).
Units held in one wallet or account generally cannot be treated as though they were held in another solely to identify which units were disposed of and determine their basis. Absent an adequate identification, the default rule is FIFO, applied within the relevant wallet or account.
These taxpayer-level basis rules are distinct from a broker’s Form 1099-DA reporting obligations. Brokers generally began reporting gross proceeds for certain digital asset sales and dispositions occurring on or after January 1, 2025. Mandatory broker basis reporting generally begins with post-2025 sales of digital assets treated as covered securities. For Form 1099-DA purposes, a covered security is generally a digital asset acquired on or after January 1, 2026 in a customer’s account by a broker providing custodial services, in exchange for cash, stored-value cards, different digital assets, or any property or services the disposition of which the broker is required to report, and held in that account until the broker effects the disposition. Basis reporting for noncovered digital assets generally remains voluntary.
Noncovered assets include many positions acquired before 2026, assets for which the broker did not provide custodial services when acquired, and digital assets transferred into the reporting broker from another platform or wallet. A transfer of digital assets generally does not carry basis information to the receiving broker through a mandatory §6045A transfer statement, leaving the investor’s own records as the link between the original acquisition and the eventual disposition.
Even where a broker does report basis, the investor should confirm that the reported figures reflect the acquisition and transfer history of the units actually treated as sold under the wallet-by-wallet rules. Supplying acquisition information to the broker does not resolve this. A broker may take customer-provided acquisition information into account for lot ordering purposes only and may not rely on it to report the customer’s basis on Form 1099-DA. See Treas. Reg. §1.6045-1(d)(2)(ii)(B)(4).
The Rev. Proc. 2024-28 Transition
The IRS paired the wallet-by-wallet requirement with a one-time transition safe harbor under Rev. Proc. 2024-28. The safe harbor generally permits an eligible taxpayer who held remaining digital asset units and units of unused basis as of January 1, 2025 to make a reasonable allocation of that unused basis among the wallets and accounts holding the corresponding remaining units.
Taxpayers may satisfy the safe harbor through a specific unit allocation or a global allocation, each with its own documentation and timing requirements. A specific unit allocation generally must be completed before the earlier of (1) the taxpayer’s first sale, disposition, or transfer of that type of digital asset on or after January 1, 2025, or (2) the due date, including extensions, of the return for the taxable year that included January 1, 2025, with a separate rule for taxpayers not otherwise required to file. A global allocation requires the method to have been described in the taxpayer’s books and records before January 1, 2025, with the allocation itself completed by the later of those same two dates, and carries additional restrictions on unit identification until it is finished: units disposed of in the interim may be identified only through a standing order or instruction, with FIFO applying otherwise. For this purpose, a transfer means a conveyance to another taxpayer.
Given this, there are three limitations to consider. First, the safe harbor governs only where basis sits, not whether the amount is correct. Second, the safe harbor only covers units that were capital assets, a scope limit that can exclude trade-or-business holdings, and reasonableness is judged separately for each type of digital asset. Third, an allocation is irrevocable for all purposes of §1012 once made, so there is no opportunity to revisit it later with better records.
Beyond those three limitations, narrower constraints also apply. These include a bar on allocating previously identified and used basis, a bar where the amount or availability of basis is before a court, Appeals, or a pre-2025 IRS examination unless a final determination was made before the applicable allocation deadline, and a requirement to separately account for post-2024 acquisitions and transfers in until the allocation is complete.
What matters now is whether the allocation has been completed correctly or, where the applicable window remains open, whether it can still be completed and supported with records. The resulting opening wallet-by-wallet or account-by-account basis positions also need to be substantiated. The stakes for getting this wrong are stated directly in the revenue procedure: a taxpayer who makes a reasonable allocation but fails to comply with the requirements of §4.02 “cannot rely on the safe harbor set forth in this revenue procedure, and such failure may result in the assessment of additional tax, penalties, and interest.”
A complete supporting file should identify:
- The allocation method used (specific unit or global);
- The wallets and accounts included;
- The type and number of remaining units in each wallet or account;
- The unused basis allocated to each wallet or account;
- The original cost basis of each unit of unused basis and the acquisition date of the digital asset unit to which that basis was originally attached;
- Confirmation that no previously identified and used basis was allocated;
- Any assumptions used to address incomplete information; and
- The date the allocation was completed.
A Continuing Transition Issue for 2026
Through 2026, a separate temporary transition rule under Notice 2025-7, as extended by Notice 2026-20, lets a taxpayer make an adequate identification of broker-held units on its own books and records, without communicating that identification to the broker, either (1) transaction by transaction, no later than the date and time of the sale, disposition, or transfer, by reference to an identifier sufficient to identify the basis and holding period of the units, or (2) through a standing order recorded in those books and records that includes sufficient information to identify the units, entered before those units are sold, disposed of, or transferred.
Most importantly, during the relief period, a taxpayer’s adequate and timely identification on its books and records governs even where the broker’s report disagrees. If the taxpayer instead specifies particular units to the broker by the date and time of the transaction, including through a standing order communicated to the broker, the units specified to the broker control for federal income tax purposes.
The Notice 2026-20 relief does not apply for purposes of the §1.6045-1 information reporting rules. As a result, for 2026 transactions the acquisition date and basis a broker reports may not match the lot identification and basis on the taxpayer’s books and records. A mismatched Form 1099-DA is, therefore, a reconciliation problem to document, not automatic evidence that the taxpayer’s identification is incorrect.
Key Investor Takeaways Based on Transition Issues for 2026
Where the broker’s report and the taxpayer’s own books and records disagree, the taxpayer’s identification controls for federal income tax purposes for 2026 transactions, provided the taxpayer made an adequate and timely identification under Notice 2026-20. A mismatch is a reconciliation item to document, not a signal to default to the broker’s number.
This relief applies only to broker-custodied units, not to self-custodied digital assets. For self-custodied assets, the regulations already permit a specific identification on the taxpayer’s own books and records, made no later than the date and time of the sale, disposition, or transfer, by reference to an identifier sufficient to identify the units, and supported by records showing that the identified units were removed from the wallet. See Treas. Reg. §1.1012-1(j)(2).
Notice 2026-20 does not alter a broker’s Form 1099-DA obligations or the Rev. Proc. 2024-28 safe harbor. Sequencing matters for taxpayers using both: a taxpayer relying on that safe harbor may rely on this relief only after the applicable Rev. Proc. 2024-28 requirements have been satisfied, including, for a global allocation, completion of the allocation. Notice 2026-20 also confirms that switching identification methods is not a change in accounting method requiring IRS consent. See Treas. Reg. §1.1012-1(j)(4).
Investors should prepare for this relief to expire after December 31, 2026. After that date, an adequate identification generally must be specified to the custodial broker no later than the date and time of the sale, disposition, or transfer, or made through a standing order or instruction communicated to the broker. The deemed standing order rule also returns: a taxpayer whose broker offers only one identification method will again be treated as having adopted that method.
A Readiness Framework
Reconstruction can be particularly difficult where there are incomplete transfer-in histories, dormant or legacy wallets, thin documentation of decentralized finance (DeFi), staking, wrapping, or bridging activity, missing exchange downloads, self-custody movements disconnected from the original acquisition history, or software still running on older universal-pooling logic. A durable readiness framework includes the following elements:
- Wallet and account inventory. Maintain a current list of every wallet, exchange account, and custody arrangement holding digital assets. For each, record the assets held, the custodian or platform, wallet addresses or account identifiers, and whether holdings include assets transferred in from elsewhere.
- Transition allocation workpapers. For positions affected by Rev. Proc. 2024-28, retain the workpapers showing how basis was allocated among wallets and accounts as of January 1, 2025: method, wallets included, units and basis assigned, the acquisition records described earlier, and completion date. Since the allocation is irrevocable, these workpapers are part of the continuing basis history.
- Contemporaneous acquisition and transfer records. Document acquisitions, transfers, staking, bridging, wrapping, and self-custody movements as they happen. Records should capture date, quantity, price, wallet, and source for acquisitions, and sending and receiving locations, hashes, and fees for transfers. While a blockchain record can establish that an on-chain transfer occurred, it does not by itself establish ownership, purpose, e.g., sale, gift, or transfer between wallets, or basis.
- Documented unit identification procedures. Investors holding multiple units of the same asset need an identification made at the time of the transaction, not after the fact.
- Form-by-form reconciliation. When a Form 1099-DA arrives, reconcile the reported proceeds to the taxpayer’s own transaction records, then separately check any broker-reported acquisition date, holding period, and basis against wallet-level records (note that basis and acquisition-date reporting is not required for every position).
- Aggregate reporting and corrections. Where a broker reports certain stablecoin or non-fungible tokens (NFT) sales on an aggregate basis, reconciliation has to run at that level rather than line by line. A discrepancy is not automatically wrong, but it needs to be investigated and documented before filing, including through Form 8949 adjustments where appropriate. If the form itself is incorrect, request a corrected one.
- Return-level cross-checks. Confirm everything on the return ties back to underlying records. Forms 8949 and Schedule D should reconcile to Forms 1099-DA received, dispositions with no form received, acquisition and basis records, and unit-level identifications.
- Retention of source data, not just summaries. Software reports are useful but are not a substitute for underlying records. Section 6001 puts substantiation on the taxpayer, and because basis carries forward until a unit is finally disposed of, the records supporting that basis should be retained until the period of limitations expires for the year of disposition.
Bottom Line
Receiving a Form 1099-DA or completing a transition allocation does not resolve the underlying basis question. The real question is whether an investor can show, wallet-by-wallet and account-by-account, how each unit was acquired, held, transferred, identified, and disposed of, and how that history supports the basis, holding period, and amounts reported on the return.
That obligation does not end after one reconciliation. Rev. Proc. 2024-28 allocations continue to affect basis calculations for as long as the affected assets are held. Reconciliation against broker reporting also does not end in 2026. It becomes increasingly important as more units become covered securities carrying broker-reported basis and the temporary books-and-records-only identification route for broker-custodied assets expires.
An investor who is not certain whether a Rev. Proc. 2024-28 allocation was completed and documented correctly, or whether a valid allocation was made at all, should resolve that now, given the deadlines described above. These issues are better addressed before the next disposition than after an examination notice arrives.
If you have questions about digital asset basis reporting, Form 1099-DA reconciliation, missing basis records, self-custody transfers, or documentation strategies, please reach out to a professional at Forvis Mazars.
*Disclaimer: This advisory is provided for educational and informational purposes only and is not intended to, and should not, be construed as financial, legal, or tax advice. Readers should consult their tax advisors regarding their specific facts and circumstances.