Wallet-by-Wallet Tracking: Mastering Revenue Procedure 2024-28

The End of Universal Wallet: A Fundamental Shift

For years, crypto investors enjoyed the simplicity of treating all their holdings as one unified pool. You could buy Bitcoin on Coinbase, transfer it to a hardware wallet, move it to Kraken, and when you finally sold, you could use the first-in, first-out (FIFO) method across all your holdings as if they were in a single account. This universal wallet approach made crypto tax calculations relatively straightforward, mirroring how many investors conceptually thought about their digital asset portfolios.

Those days have come to an definitive end. Revenue Procedure 2024-28, which took effect January 1, 2025, mandates that taxpayers track the cost basis of their cryptocurrency separately for each wallet or account they control. This isn't merely a suggestion or an alternative method—it has become the required default approach for all taxpayers dealing with digital assets.

The implications of this change run deeper than most investors initially realize. Under the new rules, if you hold Bitcoin in Coinbase, a hardware wallet, and MetaMask, you effectively have three distinct pools of Bitcoin for tax purposes. When you sell Bitcoin from your Coinbase account, you can only use the cost basis of Bitcoin that was actually held in that specific Coinbase account. The lower-basis Bitcoin sitting in your hardware wallet becomes irrelevant to that particular sale, even though it's the same cryptocurrency.

Understanding the Comprehensive New Requirements

The transformation from universal wallet to wallet-by-wallet tracking represents one of the most significant changes in crypto tax methodology since the IRS began providing guidance on digital assets. Before 2025, investors could pool all their holdings together, applying their chosen accounting method globally across all wallets. Cost basis could be averaged or optimized across all holdings, and transfers between wallets were largely ignored for tax calculations. The documentation requirements were minimal, with many investors maintaining only basic transaction logs.

The new paradigm creates distinct silos for each wallet or account you control. Every wallet maintains its own cost basis that cannot be commingled with others. When you apply FIFO or any other accounting method, it operates independently within each wallet. Transfers between wallets now require careful tracking to maintain the cost basis as it moves from one location to another. The documentation requirements have expanded dramatically, demanding comprehensive records for each wallet and detailed transfer logs showing basis movement.

This fundamental principle bears repeating because it's so contrary to how many investors think about their crypto holdings: each wallet or account exists as its own universe for tax calculations. The cost basis trapped in Wallet A cannot be accessed when selling from Wallet B, regardless of the fact that both wallets hold identical cryptocurrencies. This compartmentalization can have significant tax implications, potentially increasing or decreasing your tax liability depending on how your purchases were distributed across wallets.

Safe Harbor Provisions and Transition Relief

Recognizing the massive operational change this represents, the IRS has provided transition relief through Notice 2025-7. This temporary safe harbor acknowledges that many investors need time to adapt their systems and processes to the new requirements. Through the end of 2025, taxpayers have additional flexibility in how they implement these changes.

The global allocation method remains available through 2025 for taxpayers who maintain complete records of all their crypto transactions. This approach allows you to continue allocating basis globally across all wallets, but it requires comprehensive documentation of every wallet and transaction. You cannot cherry-pick favorable bases—if you use this method, you must apply it consistently to all your digital asset holdings. The documentation burden for this approach is substantial, as you must prove you have complete records to justify using this exception.

Alternatively, the specific unit identification method provides a permanent option for taxpayers willing to maintain meticulous records. Under this approach, you identify the exact units being sold before or at the time of sale, documenting which specific coins are being disposed of. This method demands extensive documentation but offers the most flexibility for tax optimization, allowing you to choose which specific lots to sell based on their tax implications.

For most investors, the practical choice comes down to adopting wallet-by-wallet FIFO, which offers relative simplicity with moderate documentation requirements, or investing in the infrastructure necessary for specific identification, which provides maximum flexibility at the cost of significant complexity.

Implementing Wallet-by-Wallet Tracking in Practice

The transition to wallet-by-wallet tracking requires a systematic approach that begins with creating a comprehensive inventory of every wallet and account you control. This inventory should capture not just the obvious exchange accounts but also hardware wallets, software wallets, browser extensions, mobile wallets, and any DeFi positions that might constitute separate wallets for tax purposes.

For each wallet in your inventory, you need to reconstruct its complete transaction history. This means identifying every deposit, including the date, amount, and source of funds. You must document every withdrawal with its date, amount, and destination. All trades executed within that wallet need to be logged, along with any fees paid from the wallet. This historical reconstruction can be time-consuming, particularly for active traders or those who have been in crypto for several years.

The most challenging aspect of the new requirements involves tracking cost basis through transfers. When you move cryptocurrency from one wallet to another, the cost basis must follow that transfer. For example, if you buy 1 BTC on Coinbase for $30,000 on March 1, transfer it to your Ledger hardware wallet on March 15, then move it to Kraken on June 1, and finally sell it on July 1, that original $30,000 basis must be tracked through each transfer. The receiving wallet inherits the basis from the sending wallet, creating a chain of documentation that must remain unbroken.

Choosing the appropriate accounting method for each wallet adds another layer of complexity. While you might default to FIFO for simplicity, different wallets can use different methods if properly documented. A long-term holding wallet might benefit from FIFO, while an active trading account might be better served by specific identification. The key is documenting your choice before making any sales from that wallet in the tax year and maintaining consistency once the choice is made.

Real-World Scenarios and Tax Impact

The practical impact of wallet-by-wallet tracking becomes clear through concrete examples. Consider Sarah, who bought 2 BTC at $20,000 each on Coinbase and later bought 1 BTC at $30,000 directly to her hardware wallet. When Bitcoin reaches $50,000 and she sells 1 BTC from her hardware wallet, the old universal method would have allowed her to use the $20,000 basis from her Coinbase purchase, resulting in a $30,000 gain. Under the new wallet-by-wallet rules, she must use the $30,000 basis from her hardware wallet purchase, resulting in only a $20,000 gain—a difference that could save her $1,500 to $2,000 in taxes.

For DeFi users, the complexity multiplies exponentially. Consider Mike, who starts with 10 ETH purchased on Coinbase at $2,000 each. He transfers 5 ETH to MetaMask, provides them as liquidity on Uniswap receiving LP tokens in return, and later withdraws from the pool receiving 5.5 ETH due to earned fees. When he sells 3 ETH from MetaMask, he must track that the basis for those ETH stems from his original $2,000 per ETH purchase, carried through the transfer from Coinbase, maintained through the liquidity pool interaction, and finally applied to the sale.

Each DeFi protocol interaction potentially creates a new wallet for tax purposes. The Uniswap LP position exists as a separate wallet while the funds are in the pool. The basis must be tracked into the pool when providing liquidity and back out when withdrawing. This creates a complex web of basis tracking that requires careful documentation to satisfy IRS requirements.

Documentation Requirements and Best Practices

The IRS has explicitly stated that taxpayers must maintain sufficient documentation to substantiate their basis calculations. Without proper documentation, the IRS may assign zero basis to your sales, treating the entire proceeds as taxable gain. This worst-case scenario underscores the critical importance of maintaining comprehensive records.

For each wallet, you need to document the wallet creation date, all associated addresses for blockchain wallets, complete transaction histories exported from exchanges or reconstructed from blockchain data, screenshots of major transactions, and detailed transfer documentation showing both sides of wallet-to-wallet movements. The documentation should be sufficiently detailed that a third party could reconstruct your basis calculations independently.

Transaction-level documentation requires even more granularity. Each transaction needs a timestamp with timezone information, a transaction ID or hash for blockchain verification, the amount and type of asset involved, the USD value at the time of transaction, fee amounts and types, and counterparty information where applicable. This creates a data management challenge that many investors underestimate.

Organizing this documentation effectively requires a systematic approach. Create a folder structure that separates records by tax year, then by wallet, then by transaction type. Within each wallet folder, maintain transaction histories, monthly statements, cost basis calculation worksheets, and transfer records. For transfers, create a separate section that clearly shows the movement of basis between wallets with supporting documentation from both the sending and receiving sides.

Common Pitfalls and How to Avoid Them

The transition to wallet-by-wallet tracking has created numerous opportunities for costly mistakes. One of the most common errors involves forgetting that transferred basis must be tracked through each movement. Investors often treat transfers as taxable events or lose track of the basis as it moves between wallets. Creating a detailed transfer log that shows basis movement can prevent this expensive mistake.

Another frequent pitfall involves mixing accounting methods across wallets without proper documentation. While the regulations allow different methods for different wallets, you must document the method election for each wallet before making any sales in that tax year. Switching methods mid-year or failing to document your choices can lead to IRS challenges and potential penalties.

The incomplete wallet inventory problem particularly affects long-time crypto investors who may have forgotten about old wallets, test transactions on various platforms, or small amounts left on exchanges they no longer actively use. These forgotten wallets can create reconciliation nightmares if discovered later. Conducting a thorough email search for exchange confirmations and reviewing old password managers can help identify these orphaned accounts.

DeFi complexity represents perhaps the greatest challenge in the new system. Each protocol interaction potentially creates a new wallet, and tracking basis through multiple protocol interactions can quickly become overwhelming. The solution requires treating each protocol as a separate wallet with its own documentation, maintaining detailed logs of all DeFi interactions, and potentially using specialized software designed for DeFi tax tracking.

Year-End Planning Strategies

As 2025 progresses, several strategies can help optimize your tax situation under the new rules. Consolidation of wallets, where practical, can simplify future tracking. If you have small amounts spread across numerous wallets, consider consolidating them into fewer locations before year-end. This reduces the number of separate basis pools you need to track going forward, though you must still maintain documentation of the consolidation transfers.

The choice of accounting method for each wallet deserves careful consideration before making your first sale of the tax year. Analyze the basis distribution in each wallet to determine which method would be most advantageous. High-basis coins in a particular wallet might benefit from specific identification, while wallets with steadily increasing bases might work better with FIFO.

Documentation gaps become harder to fill as time passes. If you're missing historical records, now is the time to reconstruct them using blockchain explorers, exchange APIs, and historical price data. The longer you wait, the more difficult this reconstruction becomes, and prices from months or years ago become increasingly difficult to verify.

For complex situations involving multiple wallets, extensive DeFi activity, or significant transfer volumes, professional review before year-end can identify potential issues while there's still time to address them. A tax professional familiar with crypto can help ensure your documentation meets IRS standards and identify optimization opportunities you might have missed.

Technology Solutions and Automation

The complexity of wallet-by-wallet tracking has spawned a new generation of crypto tax software designed specifically for these requirements. These platforms can automatically detect and separate different wallets, track basis through unlimited transfers, apply chosen accounting methods consistently per wallet, generate IRS-ready documentation, and maintain complete audit trails of all calculations.

When selecting a crypto tax platform, ensure it explicitly supports Revenue Procedure 2024-28 requirements. The platform should be able to maintain separate basis pools for each wallet, track transfers without losing basis information, support multiple accounting methods with proper documentation, and generate reports that clearly show per-wallet calculations.

Integration capabilities matter significantly. The best platforms can connect directly to major exchanges via API, import wallet addresses for blockchain tracking, handle DeFi protocols through specialized integrations, and accept manual entry for offline wallets. The goal is creating a single source of truth for all your crypto tax calculations.

Looking Beyond 2025

While Revenue Procedure 2024-28 establishes wallet-by-wallet tracking as the new default, this likely represents just the beginning of increased sophistication in crypto tax requirements. The IRS continues to refine its approach to digital asset taxation, and international coordination through frameworks like the OECD's CARF suggests even more detailed tracking requirements in the future.

Building robust systems now that can accommodate future regulatory changes will save significant time and effort later. Focus on creating flexible documentation systems that can capture additional data fields as required. Maintain raw data exports in addition to processed reports. Build relationships with tax professionals who stay current with regulatory developments.

The investors who successfully navigate this transition will be those who view wallet-by-wallet tracking not as a burden but as an opportunity to better understand and optimize their crypto investments. The detailed tracking required by these rules actually provides valuable insights into investment performance, fee efficiency, and tax optimization opportunities that weren't visible under the simpler universal wallet approach.

Key Takeaways