Have you ever heard the term First In, First Out? It turns out that in cryptocurrency transactions there are taxes that must be paid. What does First In, First Out have to do with transaction taxes? Check out the answer in this article.
What's that First In, First Out (FIFO)?
First In, First Out (FIFO) is emerging as a very important inventory method recommended by the IRS, especially when identifying specific cryptocurrency units becomes difficult due to missing information—a scenario known as Special Identification Method
Tax Impact of Cryptocurrency Transactions
Whenever you engage in a cryptocurrency transaction, whether acquiring or disposing of it, you potentially face taxes on capital gains and income based on the nature of the transaction. Profitable trading or earning interest on your crypto holdings requires paying taxes.
FIFO calculates the sale of your assets in the same chronological order as their acquisition. The IRS's latest cryptocurrency tax guidance report, confirms FIFO and Special Identification as the recommended methods for determining cost basis.
IRS Guidelines on Tax Calculations
The IRS determines your tax amount based on the length of time you held the cryptocurrency before selling it. Long-term capital gains discounts may apply to assets held for more than one year.
If the Special Identification rules don't apply to you, choosing FIFO is wise—it's a widely used inventory method, consistent with a conservative accounting approach.
Calculating Cryptocurrency Tax with FIFO
According to IRS guidelines, calculating capital gains involves subtracting the cost basis from the proceeds for each cryptocurrency transaction (buying, selling, trading). Yield represents the amount received, while cost basis refers to the amount paid to acquire cryptocurrency.
For crypto-crypto transactions, convert the value to USD, and consider adding the associated trading fees to your cost basis.
Imagine you bought one coin in 2015 for $1,000, another in 2017 for $2,000, and sold one in 2020 for $3,000. Using FIFO, you would sell the first coin acquired in 2015, making a profit of $2,000 ($3,000-$1,000).
Understanding and applying the FIFO method ensures a systematic and IRS-compliant approach when it comes to cryptocurrency taxation. Stay informed to effectively manage crypto tax obligations.
Also read:
Get to know what Bitcoin, Ethereum & other Crypto Taxes are
Crypto Tax in Indonesia: Based on Minister of Finance Ministerial Decree PMK 68/2022
DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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