Wallet-by-Wallet Cost Basis Tracking: IRS Cryptocurrency Requirements Explained

The End of Universal Wallet Pooling

Historically, many taxpayers and tax software platforms used a "universal wallet" accounting method:

• Aggregated all crypto holdings into a single universal pool

• Applied FIFO, LIFO, or HIFO globally across all wallets

• Assumed basis "followed" assets automatically without tracking

 
This approach developed when crypto was self-reported with minimal IRS oversight. There was no Form 1099-DA, limited exchange data sharing, and IRS data-matching capabilities were primitive.

That environment no longer exists.
 
Final regulations under IRC §1012(c)(1) ended this practice for custodial assets. Cost basis must now be tracked on a wallet-by-wallet or account-by-account basis. This prevents a taxpayer from selling Bitcoin on Coinbase but using the cost basis of Bitcoin held in cold storage to calculate the gain.

Why the IRS Moved Away From Universal Pooling

The practical problem:

• Brokers only see activity within their own systems

• They don't know where assets were originally acquired when transferred in

• Universal pooling across external wallets breaks reconciliation with 1099-DA data

• The IRS cannot match broker-reported proceeds to taxpayer-claimed basis across a universal pool

The IRS solution: Require wallet-level identification so reported transactions can be matched to documented basis within each account.

What "Wallet-by-Wallet" Cost Basis Actually Means

Wallet-by-wallet tracking requires you to:

• Identify which wallet or account holds which specific units

• Track acquisition date and cost within that wallet

• Match dispositions to the correct source wallet

• Preserve basis documentation through transfers

What it does NOT mean:

• Each wallet is a separate taxpayer (you're still one taxpayer)

• Transfers between your wallets are taxable (they're not)

• You need perfect records (reasonable, documented records work)

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It means your reporting must reflect where the asset came from and what basis attaches to it in that location.

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Fair Market Value and Cost Basis

Your cost basis is the amount you paid to acquire a digital asset, including transaction fees, measured in U.S.

dollars at the time of acquisition.

Fair market value (FMV) at acquisition establishes your initial cost basis. When you later sell, the difference between sale FMV and your cost basis determines your capital gain or loss.

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Example:

• You purchase 1 ETH for $2,000 + $50 gas fee

• Your cost basis = $2,050

• You later sell for $3,000

• Your capital gain = $950 ($3,000 - $2,050)

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Under wallet-by-wallet rules, you must track this basis per wallet—if you transfer the ETH to a different wallet, the $2,050 basis travels with it.

The "Orphaned Basis" Problem

When you transfer crypto between wallets without tracking basis, you risk creating orphaned basis:

1. You buy 1 BTC on Coinbase for $40,000

2. You transfer it to a Ledger hardware wallet

3. Your software doesn't track the transfer properly

4. You sell from Ledger

5. Software treats the Ledger BTC as having $0 basis (no acquisition record)

6. You're taxed on $40,000+ of phantom gains

This is one of the most common—and most expensive—crypto tax mistakes.

Rev. Proc. 2024-28: The Transition Safe Harbor

To address the shift from universal pooling, the IRS issued Revenue Procedure 2024-28.

It allows eligible taxpayers to:

• Make a one-time reasonable allocation of unused cost basis across wallets as of the transition date

Two allocation methods:

1. Specific Unit Allocation: Assign specific tax lots (with their acquisition dates and costs) to specific wallets

2. Global Allocation: Distribute total unused basis proportionally across all wallets holding the same asset type

Critical limitations:

• Global allocation methodology must have been documented before the transition deadline

• All allocations are irrevocable once made

• Allocations must be finalized by the earlier of: first disposition of that asset, OR your return due date (with extensions)

Taxpayers who missed the documentation deadline must use specific unit allocation or default to FIFO.

Specific Identification Rules

To use Specific Identification (choosing which tax lots to sell rather than defaulting to FIFO), you must meet documentation requirements that may include:

• Identifying the specific units being sold at the time of sale

• Documenting which lot you're selling

• Maintaining records proving the identification

• Potentially notifying your broker of the selection at the time of sale (check current IRS guidance)

Check current IRS Notices for whether you can document specific identification in your own records or must communicate to your broker. If your broker doesn't support lot selection, you may be forced to use FIFO.

Gas Fees and Transaction Costs

Gas fees are part of your cost basis calculation:

When acquiring assets:

• Add gas fees to purchase price to calculate total cost basis

• Example: $1,000 ETH + $30 gas = $1,030 cost basis

When disposing of assets:

• Gas fees reduce your proceeds (or add to selling expenses)

• This reduces capital gains or increases capital losses

Track gas fees for each transaction—failing to include them overstates your gains.

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Allowed Cost Basis Methods

Within each wallet, you may use:

• FIFO (First-In, First-Out): Default method. Oldest units are sold first. Required if you cannot specifically identify lots.

• Specific Identification: Choose which specific lots to sell. Allows LIFO, HIFO, or any tax-optimized selection. Requires contemporaneous documentation.

Note: "LIFO" and "HIFO" are not separate IRS-approved methods—they are implementations of specific identification where you choose to sell your last-acquired (LIFO) or highest-cost (HIFO) units first.

Practical Recordkeeping That Works

Defensible wallet-level records typically include:

• Clearly labeled wallets and exchanges: Maintain a list of all addresses/accounts

• Regular CSV exports: Download transaction history monthly or quarterly

• Transfer logs: Document every wallet-to-wallet movement with transaction hashes

• Transaction confirmations: Screenshots or exports of purchase/sale details

• Methodology notes: Document your cost basis method and any assumptions

Perfect records are rare. Reasonable, consistent records are defensible.

Why Software Alone Is Often Not Enough

Crypto tax software can misclassify:

• Transfers as sales (creating phantom gains)

• Wallet changes as dispositions

• Wrapped assets as taxable swaps

• DeFi interactions as income when they're deposits

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Software is a tool—not a compliance strategy. Manual review is often required for multi-wallet users, long-term holders, and anyone with significant self-custody activity.

When Professional Review Is Appropriate

Professional review is commonly appropriate if:

• Assets moved across multiple wallets over several years

• You used both centralized exchanges and self-custody

• Records span multiple tax years with gaps

• You expect large sales or liquidations

• You received broker forms (1099-DA) with missing basis

• You missed the Rev. Proc. 2024-28 documentation deadline

• You need to optimize lot selection using Specific Identification

Schedule a Consultation

Wallet-by-wallet cost basis tracking is now a compliance requirement, not a best practice. Schedule a consultation to determine whether your records are defensible under current IRS expectations.