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Overview: What is By-Wallet Basis and Allocation?

By-Wallet Basis is a new cost-basis tracking methodology for digital assets. Beginning with the 2025 tax year, the IRS is strongly recommending (and effectively requiring) that U.S. digital asset holders transition from the prior Universal cost basis methodology to By-Wallet Basis.

If you previously reported using Universal cost basis, switching to By-Wallet requires a one-time allocation of your existing tax lots. This allocation assigns your historical cost bases to specific wallets and exchanges so that cost basis can be tracked correctly going forward.

ZenLedger automates this entire process and provides two allocation strategies:

  • Lowest-cost to biggest-wallet (default)

  • Highest-cost to biggest-wallet

Why Is the IRS Moving to By-Wallet Basis?

In short: to make digital asset tax reporting easier for exchanges and easier for the IRS to verify.

This change is driven by new broker reporting requirements, including the introduction of Form 1099-DA (Digital Assets). Starting in 2026, U.S. exchanges will issue 1099-DA forms covering activity from the 2025 tax year.

These forms assume that:

  • Cost basis is platform-specific

  • Each exchange reports proceeds and cost basis only for activity on that platform

  • The IRS receives the same information the exchange provides to you

Under Universal basis, cost basis could be pulled from anywhere. Under the new reporting regime, that assumption no longer holds—hence the shift to By-Wallet Basis.

What Exactly is By-Wallet Basis? What Changes?

Under the prior Universal cost basis methodology, taxable transactions could pull cost basis from any eligible tax lot, regardless of where the assets were actually held.

With By-Wallet Basis, taxable events can only use cost basis from the wallet or exchange where the transaction occurs.

In other words:

Each transaction only pulls cost basis from the platform on which it happens.

Practical Example

Assume the following:

  • You use FIFO (First-In, First-Out)

  • You have accounts on Coinbase and Gemini

Transactions

  • Feb 1, 2025: Buy 5 ETH on Coinbase at $3,000 each

  • Mar 1, 2025: Buy 3 ETH on Gemini at $2,000 each

  • Jun 2025: Sell 3 ETH on Gemini for $2,500 each

Universal Basis (Old Method)

  • FIFO pulls the earliest ETH, regardless of platform

  • Cost basis used: Coinbase ETH at $3,000

  • Basis: $9,000 (3 × $3,000)

  • Proceeds: $7,500 (3 × $2,500)

  • Result: $1,500 capital loss

By-Wallet Basis (New Method)

  • Only Gemini tax lots are eligible

  • Cost basis used: Gemini ETH at $2,000

  • Basis: $6,000 (3 × $2,000)

  • Proceeds: $7,500

  • Result: $1,500 capital gain

This example illustrates the key difference: location now matters.

What Is Allocation?

Allocation is the one-time process of assigning your existing cost bases to specific wallets and exchanges as of January 1, 2025.

Allocation is required only if all of the following are true:

  • You reported crypto taxes prior to 2025

  • You used the Universal cost basis methodology

  • You are switching to By-Wallet Basis

If this applies to you, allocation ensures that your historical cost bases are properly distributed across your accounts so future transactions can be reported correctly.

Why Is Allocation Necessary?

Under Universal basis, cost bases were pooled across all platforms, which often resulted in confusing or unintuitive outcomes. Since By-Wallet Basis requires cost basis to be wallet-specific, those pooled tax lots must be reassigned.

A helpful mental model:

Universal basis is one big pile of assets with different cost bases.
Allocation assigns those cost bases to the wallets where the assets actually live.

Allocation Strategies

ZenLedger supports two allocation strategies:

  • Lowest-cost to biggest-wallet (default)

  • Highest-cost to biggest-wallet

The strategy determines which cost bases get assigned to which wallets based on asset balances.

Allocation Example

You hold 10 BTC across four locations:

  • 1 BTC on Coinbase

  • 2 BTC on Gemini

  • 3 BTC in a self-custodied BTC wallet

  • 4 BTC on Kraken

Your BTC tax lots:

  • 5 BTC with a $100,000 basis

  • 5 BTC with a $20,000 basis

Using Lowest-Cost to Biggest-Wallet, the allocation would look like this:

  • Coinbase:

    • 1 BTC @ $100,000

  • Gemini:

    • 2 BTC @ $100,000

  • BTC Wallet:

    • 2 BTC @ $100,000

    • 1 BTC @ $20,000

  • Kraken:

    • 4 BTC @ $20,000

The lowest-cost BTC is assigned first to the wallets holding the most BTC, followed by higher-cost lots for smaller balances.

Timing of the Allocation

  • Allocation occurs as of January 1, 2025

  • Your wallet balances on that date determine the allocation

  • The allocation is recalculated only if pre-2025 transactions change

How This Works in ZenLedger

ZenLedger is designed to make this transition as seamless as possible.

What to Expect

  • When you log in after December 31, 2025, you’ll be prompted to:

    • Switch to By-Wallet Basis

    • Choose an allocation strategy

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  • When you run a tax calculation:

    • ZenLedger automatically allocates tax lots based on Jan 1, 2025 balances

    • All 2025 and later calculations use By-Wallet Basis

Allocation Report

  • You can download a detailed allocation report from Tax Settings

  • This report shows how each tax lot was reassigned

  • For users with many accounts or transactions, the report may be large

  • Reviewing the report is optional and not required

Making Changes

  • If you modify transactions dated before Jan 1, 2025, ZenLedger will:

    • Re-run the allocation

    • Generate an updated allocation report

  • If no changes are made, the allocation remains unchanged

Disclaimer

Please note: This article is for informational purposes only and should not be considered tax advice. The new Revenue Procedure 2024-28 is still subject to updates, and our interpretation may evolve as new guidance becomes available. Always consult with a tax professional for advice tailored to your specific circumstances.