Crypto Accounting Methods

Imagine it is already tax season in a near future and you know your crypto gains will be counted; the rules feel old and sensible all at once. In the US the tax system treats virtual currency as property, so every sale or trade can create a capital gain or loss. To calculate gain you subtract the cost basis from the sale price. Cost basis is simply what you paid plus any fees. The math is easy but the bookkeeping is not when you buy the same coin many times at different prices. Which purchase becomes the cost basis for a sale depends on the accounting method you choose. The default method most people use is first in, first out or FIFO. FIFO assumes you sell your oldest coins first. That often creates larger gains in a rising market because early buys are cheaper. But FIFO also often gives longer holding periods because older buys carry older dates. Longer holding periods can qualify you for long-term capital gains treatment if you held those coins more than a year. Last in, first out or LIFO assumes you sell your most recent coins first. LIFO tends to shorten holding periods and may produce smaller gains in a rising market because recent buys cost more. Shorter holding periods usually mean short-term gains that are taxed at ordinary income rates. Highest in, first out or HIFO matches each sale with the highest remaining cost basis. HIFO usually minimizes realized gains because you pick the priciest lot to offset sales. HIFO can be the most tax-efficient choice but it requires careful tracking because lots are not used in chronological order. Specific identification methods like LIFO and HIFO are allowed when you can prove which coins you sold. That proof must include timestamps, transaction IDs, and signed records that show the exact lots. Poor records create risk and can force the IRS default method on you. Always keep complete CSV exports from exchanges and detailed logs from wallets. CSV files list dates, amounts, prices, fees and transaction hashes and make matching far easier. Also remember the one-year threshold for long-term treatment and that fees and transfer costs change your basis. Choosing a method affects both the gain amount and the holding period so the optimal choice depends on your timing and market history. Document your chosen method and be consistent each year. When in doubt talk to a tax professional who knows virtual currencies and can apply these principles to your situation.