Crypto cost basis tracking breaks when assets move between exchanges and wallets

What: The IRS now requires per-wallet, per-account cost basis tracking for digital assets (eliminating the former "universal method" that pooled identical assets across wallets), but centralized exchanges can only report cost basis for assets held from purchase to sale on their platform — any transfer between exchanges, wallets, or DeFi protocols severs the basis trail and shifts all recordkeeping to the taxpayer. For tax year 2025, brokers report gross proceeds but not cost basis, meaning a taxpayer who sold $50,000 of ETH on Coinbase that was originally purchased across Kraken, MetaMask, and a hardware wallet must manually reconstruct the acquisition cost from fragmentary transaction histories across multiple systems. Why it matters: If you cannot prove your cost basis, the IRS defaults it to zero — so what? That means you owe capital gains tax on the entire sale proceeds, not just the profit — so what? For a taxpayer who bought $40,000 of crypto and sold for $50,000, a zero-basis default turns a $10,000 gain into a $50,000 gain, potentially a $12,000+ tax overpayment — so what? Multiply this across millions of crypto holders and the aggregate over-taxation or audit exposure runs into the billions — so what? This creates a chilling effect on legitimate crypto adoption and pushes users toward non-compliance because accurate compliance is nearly impossible without expensive third-party software. Structural root cause: The IRS mandated per-account basis tracking (Revenue Procedure 2024-28) without requiring exchanges to share basis data with each other when assets transfer between them, creating an information gap that no single party in the system is responsible for closing. Unlike traditional brokerage transfers where ACATS protocols carry cost basis between firms, no equivalent protocol exists for digital asset transfers.