Talking T&E: New Crypto Tax Rules Change Planning for Advisors

Welcome to Talking T&E for Advisors, where Trusts & Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors. 

In this video, they discuss tax issues and reporting requirements regarding cryptocurrencies. 

Read the full raw transcript below:

Susan Lipp: Hello, I’m Susan Lipp, editor in chief of Trust and Estates, and I’m joined by Jamie Hopkins, CEO of Bryn Mawr Trust Advisors LLC and Chief Wealth Officer of Bryn Mawr Trust. Today we’ll be discussing the new developments in cryptocurrency, including tax issues and reporting requirements. This is based on an article in the upcoming January issue of Trust and Estates, The New Crypto Playbook by Azriel Bare and Joshua Ashkenazy. So let’s get started with my questions for Jamie. 

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The article mentions that to report the cost basis on crypto, you must use the wallet-to-wallet method instead of the previously used universal method. How does the shift from the universal method to the wallet-to-wallet method fundamentally change crypto tax planning?

Jamie Hopkins: Yeah, this is a great question, and it probably requires a little bit of background too, if you’re not familiar with some of the terminology. So, you know, kind of this idea of universal is actually more similar to how we do other things. Universal means you look at your total crypto across all platforms and add it all together to figure out your basis. It doesn’t matter if you have one on your left-hand phone or your right-hand phone—it’s universal. If I own crypto, we add it all together.

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This is moving away now, and we’re going to the wallet-to-wallet method, which is really my online crypto storage. It will matter which wallet we sell from now to figure out our basis. For example, on my right-hand phone is wallet number one. If I sell crypto from this wallet, we will go back to the first crypto that I bought on this wallet to figure out what my basis is. Versus if I sell something from my left-hand phone, we’ll go into this wallet and see what my first basis was here.

Generally, most people will be familiar with this. We still kind of follow FIFO rules—first in, first out—from a tax perspective, for basis. It’s probably more accurate in this sense because we’re treating crypto like property. Each individual crypto coin is kind of its own individual piece of property. So when we sell one, we’re trying to track back inside of each wallet to that exact basis when we’re selling it. That’s really been one of the biggest changes occurring out there. It does require, what I would say, is more meticulous tracking of your basis than before, where you could kind of just do an average. Here, it’s going to be much more important to know exactly what wallet and what the basis was inside of that wallet on each piece of crypto.

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SL: That sounds pretty complicated. New regulations will require brokers to report on a new IRS Form 1099DA, the gross proceeds for transactions and cost basis on certain transactions. Does Form 1099DA represent the normalization of crypto within the tax system, or does it introduce new confusion?

JH: Uh, you know, it’s a great question. It’s probably a bit of both. All these new things will create confusion. There’s actually a good deal of commentary from the IRS around this too, with some good faith rules that really say, “Look, we kind of expect people to make some mistakes around this, but as long as you’re acting in good faith, there might not be penalty taxes associated with their reporting for brokers.”

What is occurring has been years in the making, and the current administration definitely continues to support this. Crypto is becoming normalized, digital assets are becoming normalized, and we are trying to pull what is really a new category of technology, investing, and assets into a tax system that, for a large part, was foundationally set when the kings and queens of England of old were still ruling fiefdoms. We’re trying to kind of piecemeal this stuff together, and that is a little bit of a challenge.

But this normalization, absolutely. We required more reporting a couple of years ago. This is enhanced reporting. The IRS stated years ago they expect to generate more revenue from crypto into the future, and this is a portion of that. The reporting of the 1099DA form is making sure that the IRS is aware of transactions and the taxes that then should come along with them. So, normalization of crypto also means tax and revenue opportunity, and that is where everything is moving right now.

SL: Thank you. It seems like clients are now starting to think about gifting crypto. How should advisors think about gifting crypto during life versus holding it until death?

JH: Yeah, so I mentioned real quickly before, crypto is really treated from a tax perspective like most other types of property at this point. You’re seeing more and more of it actually during life—inter vivos—gifting of crypto, with some of the large custodians and donor-advised funds now actively supporting and marketing the gifting of crypto.

With a run-up in crypto, especially where we’re talking about this, it’s 90% of the time we’re talking about Bitcoin, so I might as well just say it too. Most of the time we’re talking about Bitcoin today and Ether. Those are the two dominant players out there, although there are thousands of others. Really, the two big players have grown a lot of value when you think about the past decade plus, and people might have very large gains inside of those—potentially large capital gains or short-term capital gains depending on when they purchased it.

One of those decisions is: do we donate this to charity and get that charitable write-off and don’t pay the income taxes? Do we sell it, pay income taxes, capital gains taxes? Or do we hold it to death, and this becomes part of a legacy vehicle that will get a step-up in basis at death like other types of property? That is a potentially beneficial way to look at this versus other assets.

Thinking about assets like your IRA or 401(k), where we do not get this step-up in basis at death, in some cases it might be better to spend while you’re alive, and in some cases it might not. But it definitely complicates the planning situation here.

SL: Revenue Procedure 2024-20208 provides guidance for calculating cost basis under that new wallet-to-wallet method that you spoke of previously. What challenges exist with that revenue procedure safe harbor for unused basis allocation?

JH: Yeah, so as you mentioned before, complication. I think part of our job on this is to make this easy. The article does a great job diving into this. I think when you look at this, you know, kind of a safe harbor, there’s a lot of confusion about this. We are expected to get updated guidance in 2026, but I would say today this—what’s reasonable allocation of unused basis—really just creates more complexity for taxpayers, leaving them in a very uncertain place.

So, what does this mean? If you have clients with a lot of crypto, you know, buy-sell transactions this past year, you definitely want to sit down with a CPA. You want to make sure you have good documentation of what your process is here, how you’re coming up with this, to make sure you fall somewhere close to this. I don’t think anyone’s going to get this perfect right now, but I think what the IRS will look for is where you make reasonable steps, where you’re kind of tracking this the best you can, where you’re relying on third-party software and CPAs until we get further guidance.

The IRS doesn’t exactly know what they’re doing here too, right? This is a new world for everyone. They’re learning along the way. So I think just make sure you’re not just saying, “Well, we don’t get it, so we’re just going to try to push it under the rug.” That’s where people are going to get in trouble. What they’ve been clear on is they want reporting, they want people doing their best, they want taxes being paid on these things. But if you’re trying your best—like a reasonable job—it should be OK.

SL: Should digital asset access planning be a standard part of estate planning?

JH: 100%. Digital estate planning is a new term that we throw around now in the financial planning and estate planning world. We have to have a process for this on our checklist of assets. We have to be looking at it. In most states now, it’s actually a breach of ethical and fiduciary duty from estate planning attorneys not to cover this topic.

So it has become a portion of this. We have to understand the basis of these assets. We need to know where they’re located, how we’re going to transfer them, and we talked about the benefits of leaving them potentially as a legacy vehicle through the estate. This has to show up. If we lose sight of these assets, people could be losing millions of dollars of value by not properly planning here. So, 100%, this just has to become a core part of our estate and financial planning process.

SL: Well, thank you so much for your insights, Jamie. I think this has become a very important issue as more and more clients own crypto and are thinking about gifting it.