First in, First Out (FIFO) is an inventory method used to specify your cost-basis when calculating your taxes.
“First in, First Out (FIFO) is an inventory method used to specify your cost-basis when calculating your taxes. It is available in many tax jurisdictions throughout the world, and is approved by the IRS. In cryptocurrency, the FIFO method considers that the first coins you purchased are also the first coins you sold when calculating the cost of goods sold (COGS) and associated taxes on profits.”
What Is First In, First Out?
First In, First Out (FIFO) is an inventory method that the IRS recommends using if U.S. taxpayers can’t specifically identify a cryptocurrency’s unit due to missing or unavailable information, otherwise known as the Specific Identification Method (see IRS Notice 24).
Every time you receive or dispose of a cryptocurrency, you may be liable for both capital gains and income tax based on the type of transaction. If you have made a profitable trade buying and selling crypto, or you are receiving interest from your crypto holdings, you will need to pay taxes.
Using the FIFO method, your assets are calculated as being sold in the same chronological order as you bought them. In its latest cryptocurrency tax guidance report, Rev. Rul. 2019-24, the IRS has classified the First In, First Out (FIFO) and Specific Identification as the recommended methods to calculate cost basis.
Keep in mind that the IRS determines the amount of tax you’ll pay based on how long you held the cryptocurrency before selling. There can be long-term capital gain discounts on assets held greater than one year. If you need to file your crypto earnings and don’t meet the Specific ID rules, choose FIFO, given it is the most commonly used inventory method and reflects a conservative accounting process.
Calculating Your Cryptocurrency Taxes Using FIFO
As per the IRS, you need to calculate the capital gains for each transaction (buying, selling, trading) using cryptocurrency by employing the standard methodology of deducting the cost-basis from the proceeds.
In this case, the proceeds refers to the amount you received, and the cost-basis refers to the amount you paid to acquire the cryptocurrency. If this was a crypto-crypto transaction, you will have to determine the values in USD. In the case that there were fees associated with the trade, you can also add this to your cost basis.
For example, you purchased one coin in 2015 for $1,000, another in 2017 for $2,000 and sold one in 2020 for $3,000. When you calculate your capital gains using the FIFO method, you will sell the first coin in your “inventory” from 2015, and your gain would be $2,000 ($3,000-$1,000).
Author: Shane Brunette is the founder and CEO of CryptoTaxCalculator.
Since 2018, he has been working closely with accountants from across the globe to develop tax software that accurately handles the nuances of cryptocurrency transactions. He has over a decade of leadership and software development experience in large enterprise, and holds a master’s degree in artificial intelligence.
Shane has experience developing robust apps, designing product roadmaps and leading engineering teams to success. He has led the development of a tax software solution for cryptocurrency users that supports hundreds of exchanges across twenty plus tax regions.
Connect with Shane on LinkedIn.