This FAQ article is divided into six steps.
1) Generating Tax Report
2) Loading Reallocation Report
3) How to Proceed if Warnings Appear in the Reallocation Report
4) How to Proceed with a Clear Reallocation Report
5) Choosing Reallocation Settings
6) Frequently Asked Questions
1) Generating Tax Report
Start by navigating to the Tax Report Page.
Depending on the accounting methods used in previous years, choose one of the following scenarios:
Single Accounting Method:
If you used only one accounting method, the process is straightforward: simply select that method with the appropriate settings and generate your report.
Multiple Accounting Method:
If you used multiple accounting methods, select the “Multi-method” option and adjust the settings for each year individually.
2) Loading The Reallocation Report
After creating the tax report, click on "Load Report".
When you generate a Reallocation report for the first time, CoinTracking will review any changes in the transactions since the tax report was last calculated.
Click on "Check transactions list for changes" to review:
If changes are detected, we recommend generating a new tax report and starting the process from the beginning.
If no changes are detected, you will be presented with the option to calculate your current holdings.
3) How to Proceed if Warnings Appear in the Reallocation Report
If warnings are displayed, please first ensure your account is correctly set up by following the steps outlined in this article: How to validate my account?
Reallocation is a complex process, and while we strive for accuracy, we cannot guarantee the report will be entirely error-free. Given the wide range of possible scenarios, it's challenging to account for every situation. If you require assistance with setting up your account or resolving any warnings, please reach out to our Full Service Team for professional assistance. Our team works closely with tax advisors worldwide and can also connect you with a tax advisor for further assistance if needed.
4) How to Proceed with a Clear Reallocation Report
5) Choosing Reallocation Settings
Reallocation Sequence
This setting allows you to choose the method you want to use for reallocation sequence. It works similarly to the method selection process for tax calculations.
Highest Price First In (HPFI):
The cost basis with the highest price will be applied to the earliest current holding by date.
Highest Price Last In (HPLI):
The cost basis with the highest price will be applied to the most recent current holding by date.
First In, First Received (FIFR):
The earliest cost basis transaction of the asset will be allocated first.
Cold Wallets
Cold Wallets refer to current holdings and are given the highest priority. It’s important to note that Cold Wallets are not limited to hardware wallets, they can include any storage method, whether custodial or noncustodial. In this context, a Cold Wallet refers to holdings associated with low-frequency trading, in contrast to high-activity wallets.
Example:
Let's use HPFI / HPLI as an example, and assume the user has exchanges A and B. We will take the record with the highest price from the Cost Base table and:
If the user selects no cold wallets, we will allocate based on the oldest (FI) or newest (LI) current holding across both A and B.
If the user selects only A, we will first allocate based on the oldest (FI) or newest (LI) holdings in B. Once all current holdings in B are assigned, we will move to the oldest (FI) or newest (LI) holdings in A.
Let's use FIFR sequence as an example, and assume the user has exchanges A and B:
If the user selects no Cold Wallets, we will allocate based on the oldest current holding across both A and B.
If the user selects only A, we will first allocate the oldest holdings in A. Once all current holdings in A are assigned, we will proceed to the oldest holdings in B.
The cold wallet function will not use the lowest cost base. Instead, it will calculate using the oldest holding by time.
6) Frequently Asked Questions
Q:
“Regarding IRS Revenue Procedure 2024-28, what do I do after I download the Reallocation Report?”
A:
For personalized advice and to ensure compliance with your specific tax situation, be sure to consult your CPA.
It is necessary to establish a Safe Harbor Allocation Plan. Adopting this plan provides you with a formal, signed, and date-stamped document for your personal records. Keep in mind that the deadline to adopt the plan is December 31, 2024, so be sure to act promptly.
Q:
"Do we have to go back in time and create a new tax report using the Reallocation process for every year we used the CoinTracking Software? How does CoinTracking know how to generate cost bases for all of my wallets moving forward (Tax Year 2025+)?”
A:
This applies only to the tax years where you need to switch from no depot separation to depot separation (Wallet-by-Wallet approach). For the US, 2024 will be the last year when no depot separation is allowed. You need to generate only one Reallocation Report for the Tax Report you will use for the final year without depot separation.
Think of it as a mechanism to transition from no depot separation to depot separation. Essentially, you need to reassign unused cost bases (those not used in your calculations) to your current holdings. For the following year (2025+), this reallocation will serve as the foundation for calculating your Tax Report.
Q:
"I'm not sure how that Reallocation Report actually gets applied in future years. Will that reallocation that I did now apply to my 2025 tax report if I turn on "Use Depot separation (tax lots)"?
A:
There will be a way to indicate this. In the future, users will need to select which tax report's reallocation they want to use (as each tax report can have only one reallocation). This feature will be implemented in a future version of US Tax Reports.