Appendix B — Tax Considerations Related to Accounting for Gains and Losses in Digital Asset Transactions
The rules governing tax treatment of digital assets generally do not depend on U.S.
GAAP accounting rules and frameworks. However, one exception is that an entity
cannot mark up a digital asset under U.S. GAAP if there is a subsequent recovery in
the asset’s value unless the entity has adopted ASU
2023-08. In contrast, for tax purposes, a gain or loss is
normally recognized only when a digital asset is sold or exchanged. In the United
States, there are two principal tax accounting methods that entities can use to
account for gains and losses: specific identification (ID) and FIFO.
The specific ID method can be used to determine the cost basis of each digital asset
the company is selling or exchanging. Under this method, every time the company
disposes of such an asset, it is specifically identifying the exact units it is
selling or exchanging. Questions have arisen about how a digital asset like BTC,
which is deemed fungible, can be specifically identified.
This issue was clarified by the U.S. Treasury and IRS in the final regulations they jointly released in June 2024. Under the
final regulations, the conventions for identifying the basis of digital assets sold
or otherwise disposed of must be applied on an account-by-account or
wallet-by-wallet basis. The final regulations apply to transactions on or after
January 1, 2025, and distinguish between the requirements for assets held by a
broker and those for assets not held by a broker.
The final regulations indicate that “[i]f a taxpayer sells, disposes of, or transfers
less than all units of [a] digital asset not held in the custody of the broker, such
as in [an] unhosted wallet . . . , the basis and holding period of the units sold,
disposed of, or transferred are determined by making a specific identification of
the units in the wallet that are sold, disposed of, or transferred.” If the taxpayer
does not specifically identify the units sold, disposed of, or transferred, the
units disposed of are considered to be the taxpayer’s earliest acquired units of
that digital asset that are “not held in the custody of the broker.” The regulations
further note that, for this purpose, “the date any units were transferred into the
taxpayer’s wallet is disregarded.”
In addition, the regulations state the following regarding the specific ID of digital
assets that are not held in the custody of a broker-dealer:
A specific
identification . . . is made if, no later than the date and time of the sale,
disposition, or transfer, the taxpayer identifies on its 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 units sold, disposed of, or transferred. A
specific identification can be made only if adequate records are maintained for
the unit of a specific digital asset . . . to establish that a unit sold,
disposed of, or transferred is removed from the wallet.
Regarding “taxpayers that leave their digital assets in the custody of a broker,” the
final regulations treat the units disposed of as the earliest acquired units of such
assets “unless the taxpayer provides the broker with an adequate identification of
the units sold, disposed of, or transferred.” For this purpose, the earliest
acquired units are determined by reference to the date the taxpayer acquired
ownership of the units, and the date on which the units “were transferred into the
custody of the broker is disregarded.”
With respect to the specific ID of units held in the custody of a broker, the final
regulations state the following:
[A]n adequate identification occurs if, no later
than the date and time of the sale, disposition, or transfer, the taxpayer
specifies to the broker . . . 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.
The taxpayer is responsible for maintaining records to substantiate the
identification. A standing order or instruction for the specific identification
of digital assets is treated as an adequate identification made at the time of
sale, disposition, or transfer.
Under Notice
2025-7, released by the IRS on December 31, 2024, the onerous
requirements related to adequately identifying digital assets held by a broker are
delayed until January 1, 2026. Instead, taxpayers may adequately identify these
assets in a manner similar to digital assets that are not held in a broker’s
custody.
Taxpayers that do not appropriately use a specific ID approach in such situations are
bound to apply a FIFO approach to the wallet or account where the asset is moved. In
other words, if a taxpayer does not take the appropriate actions to identify the
asset used, exchanged, or disposed of on a timely basis, the taxpayer is presumed to
be disposing of the oldest tax lot it holds in that particular wallet or account.
The approach used for tax purposes does not have to match the approach used for
financial statement purposes. While complex and sometimes burdensome, developing an
appropriate process for tracking the cost basis is crucial from both a tax and an
accounting perspective.
From a tax standpoint, digital assets held for investment purposes are normally
deemed capital assets. In a corporate solution, capital losses can be used only to
offset capital gains. Thus, while a company may mark a digital asset down to fair
value for accounting purposes, or up if the company has adopted ASU 2023-08, that
approach is not used for tax purposes (except in certain limited circumstances in
which a dealer or trader in digital assets elects to mark an asset to market).
Rather, an entity would recognize a DTA and, accordingly, may need to record a
valuation allowance if there are no other sources of capital gains. So how does this
play out in a set of financial statements? Members of a company’s tax function
should apply U.S. GAAP first and then factor in deferred taxes.