Before 2025, prepare for new wallet-by-wallet tax rules by strategically allocating your Bitcoin (BTC) and Ethereum (ETH) cost basis. On January 1st, 2025, assign your lowest-cost coins to long-term hardware wallets to defer taxes on your largest gains. Move your highest-cost coins to exchange wallets you use for active trading to minimize the tax impact of each sale. If you receive a valuable Airdrop, consider selling a portion immediately to cover the ordinary income tax due upon receipt. Do not forget that funds lost in exchange bankruptcies or proven scams can generate a capital loss, which can be used to offset other investment gains on your tax return.

Monero (XMR) & Other Privacy Coins

• The podcast highlights that using privacy coins like Monero (XMR) creates a higher burden of proof for the taxpayer in the event of an IRS audit.
• You must be able to prove your cost basis (what you originally paid for the coins).
• If you cannot provide records of your purchase price and are audited, the IRS will default to a $0 cost basis. This means you would pay capital gains tax on the entire sale amount, not just the profit.

Takeaways

• Meticulous Record-Keeping is Crucial: If you invest in or transact with privacy coins, it is essential to keep detailed records of every purchase, including the date, quantity, and price paid.
• Understand the Risk: The primary investment risk highlighted here is regulatory and tax-related. Failing to keep records could lead to a substantially higher tax bill than anticipated, eroding your investment returns.

Bitcoin (BTC) & Ethereum (ETH)

• These assets were used as the main examples to explain a major change in crypto tax accounting for 2025: the move from a universal method to a wallet-by-wallet method.
• Previously, you could treat all your crypto (e.g., all your Bitcoin) as one big pool, regardless of which wallet or exchange it was in. This allowed you to always sell the coins that were most tax-efficient (e.g., your oldest coins under FIFO).
• Starting in 2025, the cost basis of your crypto is siloed within each specific wallet or exchange account. You can no longer use the basis of Bitcoin held in a Trezor to offset a sale of Bitcoin on Coinbase.
• There is a one-time "safe harbor reallocation" on January 1st, 2025, where you can decide how to assign your existing cost basis across your different wallets and accounts.

Takeaways

• Strategically Allocate Your Cost Basis: Use the January 1st, 2025, reallocation to your advantage.
  • Long-Term Holdings: Assign your lowest cost basis (i.e., your oldest, cheapest coins with the biggest unrealized gains) to hardware wallets like Trezor or Ledger that you don't plan to touch. This "locks away" the large gains until you make a very intentional decision to sell.
  • Active Trading Wallets: Assign your highest cost basis (i.e., your newest, most expensive coins) to wallets and exchanges you use for frequent trading or DeFi. This will minimize the capital gains triggered by each trade.
• Be Intentional with Transfers: Moving crypto from one wallet to another (e.g., from your long-term Ledger to Coinbase to sell) will now require you to track the specific cost basis of the coins being transferred. This makes tax compliance more complex.

Stablecoins (e.g., USDC, USDT)

• Currently, stablecoins are treated as property, just like Bitcoin or Ethereum. This means every transaction, such as swapping USDC for ETH, is a technically reportable event.
• These transactions will appear on the new 1099-DA form from U.S. exchanges.
• While these trades should result in a near-zero gain or loss, the sheer volume can make your tax form look intimidating.
• A proposed bill, the Parity Act, aims to change this by treating stablecoins like cash, which would remove this reporting requirement.

Takeaways

• Don't Be Alarmed by High Proceeds on Your 1099-DA: If you use stablecoins frequently, the "total proceeds" on your tax form may be a very large number, but it does not represent your profit.
• Reporting is Still Required (For Now): You must still report these transactions on your tax return, supplementing the form with a cost basis equal to the proceeds to show a $0 gain/loss. This is a compliance headache but should not result in tax liability.

Crypto ETFs & DATS (Digital Asset Trusts)

• Investments like the spot Bitcoin ETFs (IBIT, FBTC, etc.) or trusts are treated as traditional securities (stocks), not as cryptocurrency.
• You will receive a standard 1099-B from your brokerage, which includes cost basis information, making reporting simpler.
• The most significant difference is that these products are subject to the wash sale rule.

Takeaways

• No Tax-Loss Harvesting: Unlike with direct crypto holdings, you cannot sell a crypto ETF at a loss and immediately buy it back to "harvest" the loss for tax purposes.
• 30-Day Rule: To claim a capital loss on a crypto ETF, you must wait at least 30 days before repurchasing the same or a "substantially identical" security. This is a critical strategic difference compared to holding crypto directly.

Perpetual Futures (Perps)

• Gains and losses from trading unregulated crypto perpetual futures (e.g., on platforms like Hyperliquid) are treated as capital gains and losses.
• They are reported on Schedule D, similar to regular crypto trades.
• For reporting purposes:
  • A win is reported with a $0 cost basis and proceeds equal to the amount won.
  • A loss is reported with $0 proceeds and a cost basis equal to the amount lost.

Takeaways

• Losses are Valuable: Losses from perps trading are capital losses and can be used to offset capital gains from other investments (crypto, stocks, etc.), potentially lowering your overall tax bill.
• Keep Good Records: Even though these platforms are often outside the U.S., you are still required to report the activity. Keep a clear record of your overall profit and loss (P&L) for tax reporting.

Prediction Markets (e.g., Polymarket)

• Winnings and losses from prediction markets are treated as gambling income. This has very specific and often unfavorable tax rules.
• Gambling losses can only be deducted against gambling winnings.
• You can only deduct these losses if you itemize your deductions on your tax return (i.e., you don't take the standard deduction).
• This means you could have a net loss on prediction markets for the year but still owe taxes on your total winnings if you cannot deduct the losses.

Takeaways

• High Tax Risk: This is a tax-inefficient way to speculate. You risk paying taxes on "phantom income" if you take the standard deduction or if your losses exceed your winnings.
• Consider the Net Effect: Before engaging heavily in prediction markets, understand that a break-even year in trading could still result in a tax liability.

Airdrops

• Airdrops are taxed as ordinary income based on their fair market value on the day you gain "dominion and control" over them (i.e., the day you can sell, trade, or transfer them).
• This creates a tax liability at the moment of receipt, even if you don't sell the tokens.
• The value at which you claim the income becomes your cost basis for the tokens going forward.

Takeaways

• Plan for Taxes Upon Claiming: When you claim a valuable airdrop, you have an immediate income tax liability. It's wise to consider selling a portion of the airdrop immediately to cover the expected taxes.
• Don't Ignore "Worthless" Airdrops: If an airdropped token has no market and cannot be traded, it has no value and does not create an income event. You only need to report airdrops that have a discernible market value upon receipt.

Losses from Bankruptcies, Hacks & Scams

• Bankruptcies (e.g., Celsius, Voyager): When an exchange goes bankrupt, your trapped funds can eventually be claimed as a capital loss. The situation is complex, especially with partial distributions like those from Celsius, but there is a clear path to claiming these losses to offset other gains.
• Hacks & Scams ("Pig Butchering"): It is possible to claim a theft loss for funds lost to scams or hacks. However, you must be able to prove that the funds were held with an intent to make a profit (which is typical for crypto).

Takeaways

• Turn a Loss into a Tax Asset: Do not simply write off funds lost in a bankruptcy or scam. These events can generate significant capital or theft losses that can be used to reduce your tax bill for years to come.
• Documentation is Key: To claim a loss from a scam, it is critical to have documentation. File a police report and/or an FBI report, and save all communication with the scammer. This strengthens your case for a theft loss deduction.