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Cryptocurrency CPAs race to prepare clients for end of universal wallet accounting from IRS rule change

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Accountants in the cryptocurrency arena have been busy preparing their clients for what they characterize as a seismic shift in digital asset reporting before the safe harbor provision ends in January. 

IRS Revenue Procedure 2024-28, released in June, effectively ends the longstanding practice of “universal wallet” reporting, where people could account for their digital assets, especially cryptocurrency, as a combined pool. Under the new rules, which go into effect at the beginning of next year, people will now need to report their holdings on an account-by-account basis. Zach Gordon, founder of cryptocurrency accounting firm Red Five, called the change “monumental.” 

“You’re talking about going from the universal wallet concept–which is imperfect without a doubt but something we can handle today–to what is, in essence, specific IDs, where every wallet needs to be treated as its own universe for tax purposes. This is a huge change, and considering how a lot of these reporting infrastructures, even on the transactional level, were built out, it’s not ideal,” he said.

Crypto tax

To illustrate, according to Gordon, consider an entity that runs a trading algorithm with many microtransactions, hundreds or even thousands per day and possibly millions per year. Accountants will need to capture all of those transactions, trace their paths through specific wallets, and identify what is and is not taxable through it all, which theoretically can be a very time consuming process. 

The degree of ease or difficulty of helping a client through this, said Gordon, comes down largely to their overall due diligence or “wallet hygiene,” which could best be thought of as maintaining certain habits to security, privacy and effectiveness of one’s accounts. This could include tracking things like which wallets serve which purpose, which assets are held in those wallets, who has custody of them and who controls them. While these things are often on a public blockchain, and so technically auditable, it won’t always be easy. 

Pat Camuso, founder of digital asset-focused accounting firm Camuso CPA, noted that assisting clients through this change is basically a matter of tracking and tracing assets through identifying the relevant data and drilling down at the transaction level on an asset-by-asset basis. This allows them to track the flow of funds so as to, ultimately, map the client’s accounts, everything in them, and what assets are inbound and outbound. He said it’s kind of like being a forensic accountant. 

“It takes a lot of digging, a lot of piecing together, just a tangled mess of a puzzle every time. And now this revenue procedure requires that whole tangled mess to be accurate,” he said, noting that today most just try to determine gains or losses and move on. 

If someone has already been practicing proper wallet hygiene, these engagements won’t be that difficult to get through. Unfortunately, many do not. For instance, both Gordon and Camuso noted that it’s not just possible but common for people to literally forget about a wallet and lose track of just how many they have. 

“I was just looking at an account from before, we’ve been doing their accounting since 2017, and there was a painful reconciliation process that covered maybe 12-13 wallets they didn’t tell us about, and several exchanges as well,” he said. 

Because the new rules increase complexity, the engagements will become more complex, which means they will take longer and cost more. But given the difficulty of navigating the labyrinth of assets held by some clients, Camuso said there’s not much other choice. 

“[You’ll need to be] going asset by asset, down a whole list, and ensuring that everything is allocated right. You may have 25 lots of Ethereum and now we have to snapshot your wallets and allocate them appropriately to each wallet, so with that level of complication, yes, that will increase fees,” he said. As for ongoing maintenance, “it has always been that tangled mess and fees have always reflected that as a result, because there is no way around that.”

Gordon, from Red Five, noted that even just scoping these engagements out have become a little more challenging—while many CPAs are moving away from the billable hour, he said it can sometimes be a struggle to determine a fair estimate for this work. However, he said he is less concerned about the economics of the matter than he is about the timing, as there’s a lot to do and not much more time to do it. 

“It seems like everything takes way longer. There’s way more stuff to do and the deeper you get the more challenging it gets to come up with the right answer. It depends on the platform. There’s the large institutional ones, and they’re going to be okay, they will figure out a way to make sure we’re ramped up and ready to go, but there’s some of the newer [blockchains] out there, the newer platforms are working hard but these standards are very hard to maintain,” he said. 

Camuso added that many of the accounting solutions used for cryptocurrency have been coded with the universal wallet methodology in mind, and many of them have not yet adjusted to the new rules, with a few exceptions. 

Ledgible, a cryptocurrency solutions provider, is one. CEO Kell Canty noted that users have always been able to select either a universal wallet or account-by-account approach, meaning that the only real change that had to happen was disabling the former option. Making the shift, though, may not necessarily be as easy as clicking a button. Canty said that the difficulty and complexity of the operation depends entirely on the user, there is no one size fits all. Some have exhaustive books and records and rules on how they document and approach allocations, and so won’t have much difficulty; others are a little less fastidious, and so may have a more difficult time. 

Canty added that another major challenge is that there are a lot of people, some of whom may not be as sophisticated as others, who either know very little about the change or don’t even know about it at all. Something as big as this, he said, you’d think they’d be more aware, but many don’t really think much about taxes and how they’re calculated until around April or October. It’s been a tumultuous year and people’s attention is being pulled in a lot of direction, he said, and this is a very intricate and complex change, so those who aren’t professionals won’t necessarily know to look into the implications of this. 

“It will be an education process. Not just among our own users but universally for the [professionals] and platforms to educate what it will mean on a going forward basis and how the safe harbor only exists up until January 1,” he said. 

As for Ledgible itself, he said they’re gearing up for customer service because they think they will soon be getting a lot of requests from users who suddenly become aware of the change. He noted this is more complex for the average used, and what’s more they’ll have to learn about it in a compressed timeframe, which he said might cause more confusion. Ledgible is also planning for an information campaign to help users understand what is happening and why. 

“It’s a little difficult to get casual users interested in the intricacies of tax regulations, but we will try,” he said. 

Compounding the challenge is the fact that while the shift from universal wallet to account-by-account reporting is the most prominent new rule, it’s not the only one. Another big change is first-in-first-out now becoming the default methodology. For years, many cryptocurrency holders preferred a highest-in-first-out methodology, which tended to produce better tax outcomes. Switching to a FIFO default methodology could have tax consequences for those who have meticulously structured their assets the other way, said Gordon. But he added that this will be a difficult thing for the IRS to enforce and wondered whether it might later permit other methodologies like last-in-first-out. 

“If you’ve been around this industry long enough, you know that enforcing something like this is challenging because you’re dealing with a lot of unique transactions … For certain groups or individuals, LIFO might make more sense for those who are very detail oriented while specific identification might make more sense [in others],” he said. “FIFO being the law of the land is potentially a big deal and I can see there being pushback from those who are trying to file compliantly, and at the same time there are also potential tax consequences as well.” 

Camuso noted that this will also require users with multiple wallets to be more meticulous in how they structure their assets. 

“Now in 2025 they’re creating a scenario where you can’t just plug your transactions in and pick the highest cost and call it a day–you must manage funds appropriately and flow of funds must match capital gains calculations. … It is to eliminate this idea of cherry picking the highest cost basis,” he said.  

When asked about the best practices they’ve found in helping clients through this situation, both Camuso and Gordon had similar advice: maintaining accurate records, both on the part of the client and the firm. Camuso noted that making sure the calculations are accurate up to that point is really half the battle, if this is covered then the allocations will not be very complex. Meanwhile, Gordon said it’s vital to understand all the wallets involved, what transitions are related to each of them, and making sure records are updated regularly. Preparation, overall, is key. Of course, this might be a tall order in October. Stil, Camuso said it’s important to make clients aware of this and to impress upon them it’s much better to do this before the Jan. 1 deadline. 

“To the degree that someone does not follow up with me before Jan. 1, the big thing is that deadline. It’s not even Jan. 15, it’s Jan. 1. If someone is lackadaisical and overlooks that, it won’t be a good sign. Then there becomes the question of what we will do next year,” he said. 

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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