Choosing which system you should use when calculating the cost basis for your cryptocurrencies can be extremely confusing. There are many options that are allowed by the IRS, including:
FIFO - First In, First Out - when calculating your potential taxes that you would look at the price of the first time you bought cryptocurrency (let’s say it was 1 BTC for $1k) and use that transaction to determine your cost basis. So if you bought 1 BTC for $1k a few years ago and sold it in 2019 for $5k, you would potentially need to pay taxes on the $4k difference.
LIFO - Last In, First Out - if you bought your last BTC at $5k in early 2019 and then sold it for $5k also in 2019, you would owe nothing because with this model you did not make a profit.
HIFO - Highest In, First Out - with this model, the highest-priced assets are sold first and usually generate the lowest total gain. While this can be attractive in the short-term but will eventually balance out long term and could lead to large tax bills in the future.
LOFO - Lowest In, First Out - this method is the opposite of HIFO, matching against the lowest-priced asset first, which usually generates the highest total gain in the short term, but again, will balance out over the long term.
You can use any of these 4 options when calculating your crypto tax through the Recap platform.
Recap allows you to configure a cost basis system for each tax year, as the treatment of previous tax years determines how future tax years are handled. The automatic setting within Recap is FIFO (First in, First out) as this is the most straight-forward and conservative method.
However, should you wish to use a different system, we also offer the main alternative options that are used by cryptocurrency traders like HIFO and LOFO. There is more information on the individual methods allowed in the IRS crypto FAQs, and we would advise researching these in more detail and potentially speaking to a certified tax professional if you think it may make a significant difference to your crypto tax bill and future tax planning.
Need to sort out your crypto taxes? Use Recap, the privacy focused cryptocurrency accounting software to calculate the taxable gain or loss on your cryptocurrency investments!
Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.