Crypto taxes fifo vs lifo

This calculation must also only account for a sold product — any unsold inventory cannot be applied to the cost of goods calculation. On Monday, you receive a shipment of notebooks, all priced at 1 dollar each. On Tuesday, you receive a shipment of notebooks priced at 2 dollars each. If you sold notebooks on Wednesday and used FIFO to calculate, the cost of goods sold would be dollars 1 dollar x The 2 dollar notebooks left in stock would be used to calculate the total value of inventory at the end of the accounting period.

However, if you used LIFO to calculate your cost of goods sold, the total would be dollars 2 dollars x The remaining 1 dollar notebooks would be used to calculate the value of the inventory at the end of the period. It is also not realistic for most companies, as those selling perishable goods would not leave their oldest inventory sitting in stock — that inventory would ideally be sold first.

If not for inflation, all inventory production costs would remain stable, so each method of valuation would produce the same results. Because prices rise over time, the choice of which accounting method to use can affect the inventory valuation and profitability over the period. For crypto users who use multiple exchanges or wallets, understanding how the IRS treats cost basis assignment is important.

Things can get confusing quickly. Miles Fuller is head of government solutions for TaxBit, a provider of tax and accounting services focused on digital assets. How is crypto taxed? The IRS classifies cryptocurrency as virtual currency, which is property for tax purposes. This classification means the agency treats crypto as a capital asset in almost all cases. Taxes on capital assets are straightforward. Your original purchase price is known as cost basis.

If the proceeds of a crypto transaction exceed the cost, you have a capital gain. Likewise, if the inverse is true, you have a capital loss. If you hold the asset for under 12 months, it will be treated as a short-term capital gain; if you hold the asset for over 12 months, it will be treated as a long-term capital gain.

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In most cases, the positions will rather be built up over a certain period of time and then be resold successively. In such case, the question arises as to how to calculate the profit or loss from individual sales transactions. The FIFO-method assumes that the first goods purchased are also the first goods sold. The LIFO method, on the other hand, assumes that the last goods purchased are the first goods sold. Both methods can lead to considerably different results. Assuming a crypto dealer has bought a bitcoin for EUR 1, In November, he buys a second bitcoin for EUR 6, In December he sells one bitcoin for EUR 10, If, on the other hand, the first bitcoin had been purchased in November of the preceding year already, application of the FIFO method would have resulted in the sales profit being totally exempt from sales tax due to the retention period of one year.

As a consequence, the determination of the most beneficial method always depends on the individual case. The law explicitly requires application of the FIFO method for the sale of foreign currency amounts only. As cryptocurrencies are, by their nature, quite similar to foreign national currencies, a corresponding application of the FIFO method may seem appropriate. In the above example, the average purchase price of the bitcoin would be EUR 3, The taxable profit would hence be EUR 6, Only goods that are sure to have been sold outside the speculation period are taken into account for the purposes of the average method.

In this regard it is similar to the FIFO method. So far, it is still unclear whether this case law also applies to cryptocurrencies. The legislator reacted at the time and legally mandated the FIFO method for the sale of foreign currencies. For example, in the United States, short-term capital gains tax rates are equivalent to your income tax rate. Traders who hold appreciating positions over a long period of time may benefit from using the FIFO method of accounting.

Traders who use the LIFO method of accounting calculate capital gains on the difference between the price of the sale and the most recent buy price. Even though LIFO typically requires traders to use a higher tax rate, the resulting tax burden may end up being less than the FIFO method because price swings tend to be smaller in the short term.

In certain jurisdictions, brokers in regulated markets require traders to use the FIFO method of accounting.