Overview of this week’s newsletter

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Executive Summary

• Bitcoin & Taxes: Our CPA, Arniel Sia, highlights urgent IRS rule changes coming in 2025. He explains how to preserve your preferred cost-basis method (HIFO/LIFO) and avoid unnecessary tax hits by documenting your pre-2025 Bitcoin properly.

Key Headlines:

• Bitwise files an ETF to invest in companies holding substantial Bitcoin reserves.

• Multiple nations are considering Bitcoin reserves for 2025, hinting at accelerating global adoption.

• Strive Asset Management proposes a Bitcoin Bond ETF, combining MicroStrategy’s convertible bonds with Treasuries.

• Of the 55,000 listed companies worldwide, the top two stocks by percentage return in 2024 (with market caps over $250M and average daily trading volumes over $50M) both hold Bitcoin on their balance sheets.

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Key insight

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This week's key insight on bitcoin and taxes is kindly written by Arniel Sia.

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Update - December 31, 2024:

The IRS has announced a temporary relief, delaying the requirement that exchanges and brokers report FIFO (First In, First Out) for bitcoin sales. The implementation has been postponed to January 1, 2026.

Taxpayers can continue using other methods in 2025. However, the safe harbor rules still apply, so it is highly recommended to document your safe harbor and follow the recommendations!

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Bitcoin and Taxes - Don't The IRS Take More Than They Should!

The IRS recently introduced new rules requiring taxpayers to document their cost basis allocation methods for bitcoin acquired before 2025. While this announcement created significant concern, the temporary relief provides additional time to prepare.

My name is Arniel Sia, and I am a Bitcoiner and CPA. Like many of you, when I first heard about the new changes, I was extremely frustrated in trying to figure out what exactly the new IRS rules were for bitcoin taxes and what we needed to do to get ready.

Furthermore, I had clients and Twitter friends asking me about this, and so I poured myself into the material to really understand what was happening.

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What's at Stake?

Starting in 2026, exchanges will be required to report on a cost basis—which means even more oversight and less room for error. But it doesn’t stop there.

Starting in 2025, taxpayers will be defaulted to use the FIFO (First-In, First-Out) method. That means HIFO and LIFO are off the table for any new transactions. The only exception is the safe harbor: you can still use HIFO or LIFO for purchases made before 2025, but you need to document your basis to do so carefully.

And if that wasn’t bad enough, the IRS is also scrapping universal accounting. This means you’ll now have to track the cost basis for every individual account or wallet, making an already messy process even more complicated.

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Do You Need to Report Wallets or Transactions?

Thankfully, you are not required to report your wallets, transactions, or UTXOs to the IRS. These records are for your personal use, ensuring you can prove your cost basis in case of an audit or sale.

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Action Steps for the Safe Harbor

The safe harbor is designed to help taxpayers transition to this new system by letting them allocate the cost basis of their pre-2025 bitcoin for each wallet or account.

To qualify for the safe harbor, you’ll need to allocate the cost basis of your pre-2025 bitcoin to each wallet and keep those records separate from any bitcoin acquired in 2025 or later. There are two main approaches to tracking cost basis under the safe harbor:

1. Specific Unit Allocation: Each lot of bitcoin retains its original cost basis and acquisition date. This method allows for precise tax strategies, such as HIFO or LIFO, but it requires meticulous records for every transaction to comply with IRS rules. Deadline: The earlier of:

○ Before your first sale in 2025.

○ The due date of your tax return (April 15 or October 15 with extension).

2. Global Allocation: Allocate pre-2025 bitcoin on a wallet-by-wallet basis and assign a weighted average cost basis to all bitcoin within each wallet. This means that within a wallet, all coins are now assigned the same cost basis. While this simplifies tracking and documentation, it limits flexibility for tax optimization compared to specific unit allocation.

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Recommended Actions

1. Choose the Specific Allocation Method: This gives you more flexibility for timing.

2. File an Extension: This will give you an extra six months to get your records in order. There’s no harm in filing an extension, even if you end up filing before April 15.

3. Document Cost Basis Before Selling: If you absolutely need to sell any bitcoin, ensure your records are in order before that sale.

4. Allocate Pre-2025 Cost Basis: Assign the cost basis of your pre-2025 bitcoin on a wallet-by-wallet basis to maintain safe harbor eligibility.

5. Document Your Safe Harbor: Maintain clear documentation showing the basis allocations for each wallet. Include records of acquisition dates, transaction IDs, wallet designations, and the allocation method used (specific unit or global allocation). I would also timestamp your documentation to avoid any doubt in case of a future audit.

6. Track New Purchases Separately: Keep bitcoin purchased in 2025 or later in a separate wallet to comply with FIFO rules.

7. Consult a Professional: Work with a tax expert to navigate these changes and optimize your strategy.

Tools for Compliance

I highly recommend using tools like CoinTracker or CoinLedger to help document your transactions and cost basis allocation accurately.

These changes aren’t just frustrating—they’re a ticking time bomb for anyone who isn’t prepared. The safe harbor exists to protect you from unnecessary IRS scrutiny, but you must document it before the deadline to document your cost basis allocation. Remember, do this before:

1. Your first sale in 2025.

2. The due date of your tax return (April 15 or October 15 with extension).

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If you still have questions, feel free to write to Arniel at arniel@siacfo.com or on X/Twitter at @ArnielSia.

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Top News Stories

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Bitwise Proposes ETF Focused on BTC-Holding Corporations – Bitbo

Bitwise Asset Management has filed for an ETF that invests in companies holding significant Bitcoin reserves, with a focus on those with over 1,000 BTC.

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Nations Eye Bitcoin Reserves for 2025 Adoption – Bitbo

Franklin Templeton predicts a surge in Bitcoin reserve adoption by nations, with Germany and Hong Kong signaling interest.

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Strive Asset Management Files for Bitcoin Bond ETF – Bitbo

Strive Asset Management plans a Bitcoin Bond ETF, offering exposure to MicroStrategy's convertible bonds and U.S. Treasuries.

Other Noteworthy News

🟢El Salvador's Bitcoin Holdings Exceed 6,000 BTC

➡Tether Transfers 7,629 BTC to Strategic Reserve

🔵MicroStrategy Buys Another $209 Million Worth of Bitcoin Before New Year’s Eve

💳Rumble to pay creators in Bitcoin, ushering in a new era for Bitcoin in the creator economy.

🗓️MicroStrategy Calls for Shareholder Meeting to Accelerate 21/21 Plan

📈Of the 55,000 listed companies worldwide, the top two stocks by percentage return in 2024 (with market caps over $250M and average daily trading volumes over $50M) both hold Bitcoin on their balance sheets.

🟠Russian companies have started using Bitcoin for international payments after legislative changes permitting its use to counter Western sanctions, Finance Minister Anton Siluanov announced Wednesday.

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Recommended Article

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Bitcoin: Use It Or Lose It

Why simply hodling bitcoin and watching the number go up is not enough for it to succeed.

This article talk about how bitcoin thrives on active use. Transact, build, and engage to preserve its freedom and resist regulatory control.

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Recommended Podcasts

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Bitcoin Year-End Tax Emergency (IRS Safe Harbor Plan)

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Bitcoin Year-End Tax Checklist

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CD147: TAX PLANNING AND NEW IRS RULES WITH SATOSHI PACIOLI

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Bitcoin 101 - How Bitcoin is Changing the World with Robert Breedlove (WiM543)

The "What is Money?" Show · I join Ste Lane of Radical Health Radio to discuss the basics of Bitcoin, money as the most sought after monopolistic power of man, money as abstracted time and energy, fiat money and fiat food, Satoshi Nakamoto and the Cypherpunks, Bitcoin not Shitcoin, and how Bitcoin is changing the world.

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Chart of the Week

Bitcoin Active Addresses

This chart tracks active Bitcoin addresses, rising with adoption and falling during price drops, using a 7-day average to smooth trends.

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“We’re talking about a change in how humanity organizes itself.”

– Andreas Antonopoulos

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