Just how complicated can cryptocurrency taxation be? And how costly are mistakes or oversights? In a recent episode of the Federal Tax Updates podcast, hosts Roger Harris, EA, and Annie Schwab, CPA, spoke with Amir Marmar, CEO of JFDI Accountants. Amir helped a client resolve a longstanding $2.5 million crypto tax liability in just two months after other firms had struggled for five years.
Below are key takeaways from their conversation to help you better understand cryptocurrency reporting challenges, looming regulatory changes, and when to consider bringing in a specialist.
A $2.5 Million Crypto Dilemma, Solved
In this case, the client faced over $2.5 million in back taxes, penalties, and interest tied to cryptocurrency transactions. Multiple professionals attempted to reconcile the client’s records for years, yet the complexity of crypto wallets and transfers and inconsistent guidance left the issue unresolved.
Enter JFDI Accountants. After reconciling every transaction, discovering overlooked data, and determining the correct basis and treatment of transactions, Amir concluded that the client owed $0.
As Amir explains, “In about two months’ time, I decrypted the entire puzzle and identified a core issue with the IRS that will forever change all audits.”
That’s quite the argument for why clients who own digital assets need an advisor with deep crypto expertise.
Why Cryptocurrency Taxation Is So Complex
A few factors make accounting for cryptocurrency complex.
Wallets, Addresses, and Recordkeeping
Crypto wallets aren’t physical objects but software or hardware that store the “private keys” granting access to digital assets. From browser-based wallets (like MetaMask) to hardware wallets (resembling USB sticks), users can easily create new wallets. Add multi-signature (multi-sig) wallets, which require multiple approvals for transactions, and it’s easy to see why clients may not accurately track every address.
Amir observes that many clients forget entire wallets:
“They might say they have 60 to 70 wallets, and we discover 70 or 80 more along the way. They’re not maliciously withholding; they just forget.”
Even experienced practitioners might not be familiar with thorough “wallet hygiene” and good recordkeeping, which alone makes reconciling crypto data more complicated than reconciling most traditional assets.
DeFi, Staking, and Liquidity Pools
Beyond basic trading, cryptocurrency expands into decentralized finance (DeFi). Tax treatment of lending protocols, staking, and liquidity pools remains partially uncharted territory. Amir explains some of these terms for advisors who are new to crypto reporting:
- Lending protocols. Clients might loan digital assets and receive them back in kind, potentially rendering the original loan non-taxable. But interest or reward portions become ordinary income.
- Staking. Locking up tokens to support network validation can generate periodic rewards. Determining exactly when to realize income can be tricky.
- Liquidity pools. Taxpayers effectively become part of an unstructured partnership by providing tokens to a pool for exchange or swapping. Shifts in the pool’s composition often trigger taxable events.
Because the IRS offers limited authoritative guidance, tax practitioners must adopt reasonable positions while minimizing potential client exposure or risk.
The IRS Shifts to Wallet-Level Reporting
An especially critical update is IRS Revenue Procedure 2024-28, which took effect on January 1, 2025. Historically, many tax preparers applied a “universal” first-in, first-out (FIFO) or last-in, first-out (LIFO) method to all holdings of a given currency—no matter how many wallets the client used.
Under the new rules, cost basis reporting must be at the wallet or account level rather than universally aggregated. In Amir’s example, a taxpayer holding 10 Bitcoin across two different wallets must now treat each wallet’s activity independently:
“If you have Bitcoin in ten wallets and ten wallets are active, I cannot give you one report. I have to give you ten.”
To ease this transition, the safe harbor rule allows taxpayers to reassign basis among wallets at the end of 2024. Nonetheless, the added complexity requires more meticulous data gathering, reconciliations, and analysis—especially for clients with significant holdings.
Knowing When to Bring in a Crypto Specialist
Many practitioners can handle basic crypto scenarios—like a single exchange (Coinbase) with limited buys, sells, and straightforward records—much like stock transactions. However, once clients branch into multiple wallets, DeFi activity, staking, or liquidity pools, the complexity can surpass what is feasible in standard tax preparation workflows.
Amir acknowledges that some specialized crypto software can assist but warns against over-reliance on “plug-and-play” solutions. JFDI Accountants uses a six-step method—data gathering, standardization, reconciliation, categorization, cost basis assignment, and final reporting—to ensure completeness and accuracy. Manual checks are essential, especially with unique or emerging blockchain protocols.
Tax professionals who collaborate with specialists ensure thorough bookkeeping and analysis and mitigate risk.
Amir says, “The tax preparer takes less risk when you know the work is detailed and accurate. You can comfortably sign the return.”
Best Practices for Tax Professionals
Amir recommends the following best practices for practitioners serving clients with digital assets.
- Vet the complexity early. Include crypto-specific questions in intake forms to verify the number of wallets, exchanges, DeFi usage, and potential offshore structures. If a client’s footprint spans numerous wallets or protocols, consider referring them for specialized accounting support.
- Maintain close collaboration. Working with a crypto accounting specialist should feel like a partnership, not an outsourcing arrangement. Just make sure you define responsibilities: let the specialist do the deep-dive accounting while you focus on tax strategy and final compliance.
- Track evolving guidance. The IRS is actively updating rules for both centralized and decentralized transactions. Stay informed about Rev. Proc. 2024-28 and watch for future clarifications on lending protocols, staking, and liquidity pool taxation.
- Stress recordkeeping and wallet hygiene. Urge clients to document every transaction and wallet address. Good wallet hygiene (i.e., not overly commingling funds across accounts) simplifies cost basis calculations and mitigates confusion.
As cryptocurrency adoption rises and the IRS refines reporting rules, tax professionals can expect more clients with complex crypto activities—whether they seek it or not. The lesson from Marmar’s success is clear: if the case moves beyond basic exchange trades and stumbles into under-explored territory, specialized expertise saves time, money, and frustration.
Listen to the full Federal Tax Updates podcast episode featuring Amir Marmar for more insights on complex crypto taxation.