How Will The New Crypto Tax Reporting Rules Impact Institutional Clients?

In General

In 2024, the Treasury Department and the IRS issued final digital asset broker reporting rules (“Final Rules”). These rules require U.S. digital asset brokers to report certain information to the IRS and you for digital asset transactions you engage in with Coinbase. In this article, we summarize key rules for you to keep in mind and how Coinbase expects to manage its reporting obligations because Coinbase is committed to complying with all laws and regulations for digital assets. 

Before we dive in, please remember that Coinbase doesn’t provide tax advice. This article summarizes current IRS guidance, which may continue to evolve and change. None of this should be considered advice or an individualized recommendation, but it’s important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.

Form 1099-DA

For digital asset transactions that occur in 2025, U.S. digital asset brokers are required to report only gross proceeds information. For digital asset transactions that occur in 2026 and thereafter, U.S. digital asset brokers are required to report cost basis and gross proceeds information. Under the Final Rules, reportable digital asset transactions generally include most sales or exchanges other than the following:

• Wrapping and unwrapping

• Liquidity provider

• Staking

• Lending

• Short sales 

• Notional principal contracts

These rules apply only to U.S. digital asset brokers. So, if you don’t transact through one of Coinbase’s U.S. entities for trading, brokerage, or custody services, you should not expect to receive a Form 1099-DA. If you do transact through one of Coinbase’s U.S. entities, then you may receive a Form 1099-DA: 

• In 2026, reporting only gross proceeds information for transactions in 2025

• In 2027, reporting cost basis and gross proceeds information for transactions in 2026

Tracking Digital Assets by Account or Wallet 

Under the Final Rules, the universal or multi-wallet method for relieving digital assets is no longer allowed for transactions occurring on and after January 1, 2025. Taxpayers now need to track digital asset holdings by each separate account or wallet they hold. For instance, 1 Bitcoin sold from broker A cannot be assigned a cost basis from 1 Bitcoin held with broker B. This is a significant change for taxpayers who may have been tracking digital assets using a universal or multi-wallet method. 

The IRS recognized this and provided taxpayers with a one-time safe harbor to help taxpayers transition from a universal or multi-wallet method to a wallet-by-wallet or account-by-account method. In general, this safe harbor permits taxpayers to make reasonable allocations of unused cost basis among digital assets held as of January 1, 2025, as long as they satisfy the safe harbor requirements, which importantly includes a requirement that taxpayers should be able to substantiate the allocation with adequate records. Without this safe harbor bridge, ending the universal or multi-wallet approach could cause broker A’s records to show an overstated cost basis and broker B’s (or the taxpayers’) records to show an understated cost basis.

Although not required under current law and given the release of Notice 2025-7 (described in more detail below), Coinbase will provide you with an opportunity to update your cost basis details for digital assets you hold in Coinbase accounts so that the cost basis details we have for your digital asset holdings match the cost basis details you have in your books and records for purposes of reporting cost basis and gross proceeds on Form 1099-DA for transactions in 2026. (Please note that this feature is not available currently and will be released at a later date. We will provide further instructions on how to update your cost basis details later this year.) Please keep in mind, however, that if you are relying on the safe harbor you should generally complete your cost basis allocations and document them in your books and records by January 1, 2025. Please refer to the IRS guidance and consult with a tax professional.   

Tax Lot Relief Method Instructions

Under the Final Rules, for all transactions occurring on and after January 1, 2025, taxpayers are allowed to identify which digital asset units should be sold, disposed of, or transferred, but only if taxpayers provide adequate identification to their digital asset brokers before the date and time of the sale, disposition, or transfer. Taxpayers are responsible for maintaining records to substantiate the identification. A standing order or instruction for the specific identification of digital assets to be sold, disposed of, or transferred is treated as adequate identification. If taxpayers do not provide adequate identification, digital asset brokers are required to apply a first-in, first-out (“FIFO”) method. 

On December 31, 2024, the Treasury Department and the IRS issued Notice 2025-7, which provides alternative methods for taxpayers to adequately identify sales, dispositions, or transfers of digital asset units held in a digital asset broker’s custody. In particular, the notice provides temporary relief for taxpayers to be able to make an adequate identification by either (1) identifying, no later than the date and time of the sale, disposition, or transfer, on the taxpayer’s books and records, the particular units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or the purchase price for the unit, that is sufficient to identify the basis and holding period of the units sold, disposed of, or transferred or (2) recording a standing order on the taxpayer’s books and records, provided that the recorded standing order includes sufficient information to identify any digital asset units sold, disposed of, or transferred and is entered into the taxpayer’s books and records before the units covered by the order are sold, disposed of, or transferred. The temporary relief granted under Notice 2025-7 is applicable only for digital asset transactions in 2025. Taxpayers may still rely on the Final Rules to provide a standing order or instruction to their digital asset brokers. 

Currently, Coinbase is only able to accommodate standing orders or instructions for FIFO, highest-in-first-out (“HIFO”), and last-in-first-out (“LIFO”) methods. As of December 19, 2024, you are able to update your tax lot relief method by navigating to the Taxes Tab within your Account Settings page. (Please see Navigating Account Settings below for detailed steps.) Given the release of Notice 2025-7, below are your options:

• If you have already updated your tax lot relief method with Coinbase either via the Tax Settings tab in your account or by sending us an email, you may keep your current methodology as is. 

• If you have not yet updated your tax lot relief method with Coinbase either via the Tax Settings tab in your account or by sending us an email, you may still do so.

• If you intend to rely on Notice 2025-7 and specific instructions or standing orders documented in your books and records, no action is necessary since adequate identification is established in your books and records, but for 2025 transactions only.

If you do not update your method, our system will default you to FIFO and apply FIFO to all of your digital asset transactions. (Please note that only individuals with entity-level permission will have the ability to make tax lot relief method changes.)  

You may change your tax lot relief method more than once. If you do, the prior method will be applied to all digital asset transactions up to the effective date and time of the method change. For instance, assume you first make a tax lot relief method change to HIFO on February 28, 2025 at 5:00 PM ET and then change your method to LIFO on June 30, 2025 at 5:00 PM ET. 

• Transaction activity between January 1, 2025 and February 28, 2025, 5:00 PM ET will reflect the FIFO method. 

• Transaction activity between February 28, 2025, 5:01 PM  and June 30, 2025, 5:00 PM ET will reflect the HIFO method.

• Transaction activity between June 30, 2025, 5:01 PM ET and December 31, 2025 will reflect the LIFO method.

Please note that while you will be able to change your methods throughout the year, you won’t be able to review real-time details until we finalize our reporting infrastructure build-out sometime in late 2025. Once our systems are up and running, we will apply your tax lot relief method(s) to your transaction activity and send you a notification.   

Navigating Account Settings

• Log in to your Coinbase Prime account and open your Account Settings.

• Navigate to the Taxes Tab within Account Settings.

• Under the "Tax Lot Relief Method" section, review your current selection. FIFO will be selected by default.

• Select Edit to change your preferred method.