Welcome to the EDAS Highlight Series! Each week, we’re diving into one of the highest-rated sessions from this year’s conference.
Want to watch the full video? All session recordings are available for on-demand viewing and CPE credit at Bitwave University.
EDAS Highlight Series: Session #2
The recently-published US treasury and tax regulations mark a significant shift for digital asset finance best practices. In this deep-dive discussion, two phenomenal experts from Deloitte share key updates and practical guidance for businesses looking to better prepare for these changes.
The session features Rob Massey, partner, global & U.S. Tax Blockchain & Digital Assets leader, Deloitte Tax LLP and Conor O’Brien, senior manager, Deloitte Tax LLP.
Introduction: Deloitte’s Digital Asset Experience
Deloitte has been in the digital asset game for a while – 13 years, to be exact. And over that time, they’ve developed a deep knowledge of blockchain technology which informs their analysis of tax regulation.
Together, Rob and Conor kicked off their session with an exciting announcement – the publication of a deep and comprehensive guide of federal crypto and digital asset tax rules.
This new guide – officially a BNA Tax Management Portfolio – is the culmination of two years of work from Rob, Conor, and 50+ co-authors and contributors.
“This is our effort to try to share some of our insights with those who care about tax” - Rob Massey
The (almost) 400-page document covers a wide range of topics in cryptocurrency taxation – like corporate funding transactions, multi-state and sourcing issues, crypto compensation, and international considerations. The document will serve as a continuously-updated resource for enterprise tax professionals.
Ready to check it out? Portfolio 190 is now available on the Bloomberg Tax Research platform.
New Treasury Regs: What's Inside Section 1012?
Just one month before EDAS, the IRS issued new guidance for the taxation of digital assets – including new regulations and a Revenue Procedure.
This guidance brings significant changes to how brokers report transactions and how basis tracking is handled. All of these updates will come into effect in January 2025.
Introductory highlights:
- From a tax perspective (ordinary vs capital)... character matters. And not just on sale or disposition transactions. There are several parts of the tax code where the character of the assets you're holding matters.
- Section 1012 regulations apply to capitalize assets only. (There are other rules that impact ordinary assets.)
- There is significant distinction for tax consideration between assets held in self-custody versus those held with brokers or custodians.
- When using specific identification, timing is critical. Always prepare contemporaneous documentation that you’ve chosen a specific tranche before the transaction.
- The 1012 regs also clarified transaction fee confusion from the original proposal. Under the final guidance, transaction costs are part of the disposed asset. (No weird splitting costs. WHEW.)
- You can switch between one type of specific identification and FIFO without impacting your method of accounting under 1012.
Custodied Assets: Basis Tracking & Spec ID
Custodians and brokers will have an obligation to track the cost basis of digital assets purchased on their platform. They will also have to present customers with a method to specifically identify the lots they want to sell.
This could all be a challenge for custodians and brokers who do not yet have a user interface for this operation today.
So, what’s the solution? Proper books and records.
Maintaining a detailed process is critical for substantiating the tranche identification with an audit trail – and avoiding potential heartburn if there is a disagreement later with your broker.
Spec ID for Self-Custodied Assets
Since there is no natural third-party under a self-custody scenario, the tax considerations are quite different.
If you think about the experience of using a self-custody wallet, you’re used to seeing an aggregate balance across addresses. There’s typically no segregation of tax lots within a traditional crypto wallet.
This means you need to match the digital asset transaction activity from your wallet (or crypto processing system) with the accounting software that’s tracking your granular tax lots.
“The real, important piece here is making sure that you have some way of documenting your intent to move or sale a specific asset” - Conor O'Brien
And finally, be sure to identify, document, and consistently apply your chosen method of specific identification – on a wallet-by-wallet basis. There is no longer a concept of “global FIFO”.
Rev. Proc. 2024-28: A Basis Re-Allocation Bonus
Are you using a global or universal view of your holdings? This new Rev. Proc is for you.
The IRS seems to acknowldge that basis tracking has been a bit of a "Wild West" scenario for some time. Under this new guidance, taxpayers recovering basis on a FIFO global methodology can reattribute unused basis to different digital asset tranches.
“This should be something that 100% of us should be thinking about - even if your books and records are really tight.” - Rob Massey
But, don’t wait! This is a one-time opportunity to clean things up and mitigate risk – from now until January 1, 2025.
This opportunity is only applicable to capital assets, though. Not on ordinary assets.
Simplified Contemporaneous Selection with Bitwave
Even though this Rev. Proc. has only been out for a month, Bitwave has already engineered a solution to ensure your intentions (on a contemporaneous basis) are built into your books and records.
Our newest Inventory View feature allows you to easily secure full records for contemporaneous selection ID.
Step-by-Step with Contemporaneous Selection in Bitwave:
- Easily review your Open Lots in one simplified view
- Quickly select and confirm the exact lot for your transaction
- Automatically pick up and document the contemporaneous trade time stamp
- Securely confirm your post-trade match
As the January 2025 deadline approaches, it’s crucial for digital asset finance leaders to review their current practices and ensure they are prepared for the new requirements. And we're here to help you make this transition as smooth as possible. Reach out to our team if you want a demo of Contemporaneous Selection.
Want more? Watch the full session recording on Bitwave's online certification platform, Bitwave University!
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
