FIFO, LIFO, and HIFO - What’s the best method for crypto? | CoinLedger (2024)

FAQs

Should I use FIFO or HIFO for crypto? ›

FIFO is used by most investors since it is considered the most conservative accounting method. While methods like HIFO and LIFO can reduce your tax bill, they should only be used if you've kept detailed records of your crypto transactions.

Depending on the price paid when you purchased that crypto, taxable gains or losses will be computed as the difference between the purchase price and the sale price. You can minimize your taxes owed by changing how you compute your cost basis, typically most beneficially with the HIFO accounting method.

FIFO cost basis crypto

First In, First Out (FIFO) is one of the most common cost basis methods and it's very straightforward. FIFO means the first asset you buy is the first asset you sell.

Instead of beginning with the crypto price and holding period of your first asset purchase, the “LIFO” method assumes you sell the last crypto asset you purchased first (and goes back in reverse chronological order to your first purchase).

The Internal Revenue Service does not recognize HIFO (high in, first out) as an accounting method but it generally permits an investor to specifically identify his or her shares at the time stock is sold, for reporting capital gains and losses.

FIFO is the most logical choice since companies typically use their oldest inventory first in the production of their goods. Deciding between these two inventory methods as implications on a company's financial statements as this decision impacts the value of inventory, cost of goods sold, and net profit.

When you purchase a crypto asset with fiat money, credit your cash account and debit the crypto-asset account. To account for any losses as they occur, you'll need to debit your loss account and credit your asset account.

The average cost method for determining cost basis is most commonly used for mutual funds. To calculate your basis, the average cost method takes the cost of all the shares you have purchased and divides it by the number of shares.

How to buy crypto without high fees? ›

To Keep Fees Low, as a Rule of Thumb, Use Bank Deposits and Limit Orders: In general, things like using bank wires to fund a crypto account, buying with a credit card, and using market orders instead of limit orders can result in higher fees.

Using the highest-in-first-out cost-basis method (HIFO), you sell the crypto first that has the highest cost basis to keep your gains — and your taxes — as low as possible. Last-in-first-out (LIFO) accounting means you sell the crypto you bought most recently — this can be advantageous when values are increasing.

Highest in, first out (HIFO) is an inventory distribution and accounting method in which the inventory with the highest cost of purchase is the first to be used or taken out of stock.

Coinbase customers can manage their cost basis method in their tax center settings, where they can choose between a HIFO (highest in, first out), LIFO (last in, first out), and FIFO (first in, first out).

The IRS takes a similar approach to cryptocurrency cost basis as traditional equities and allows two methods for calculating cost basis when disposing of virtual currency: First-in, First-Out (FIFO) Specific Identification.

1. Can the IRS track crypto? Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them. Also, in recent years, several exchanges have received several subpoenas directing them to reveal some of the user accounts.

1: Batch Processing. FiFo in its strictest sense is difficult to maintain in batch processing. If you are moving or processing your parts in boxes or batches, then it will be difficult to maintain a FiFo within the box.

The first-in, first-out (FIFO) inventory cost method assumes the oldest inventory is sold first. This leads to minimizing taxes if the prices of inventory items are falling.

FIFO is more likely to give accurate results. This is because calculating profit from stock is more straightforward, meaning your financial statements are easy to update, as well as saving both time and money. It also means that old stock does not get re-counted or left for so long it becomes unusable.

How do I record crypto for taxes? ›

Do you pay taxes on crypto? People might refer to cryptocurrency as a virtual currency, but it's not a true currency in the eyes of the IRS. According to IRS Notice 2014–21, the IRS considers cryptocurrency to be property, and capital gains and losses need to be reported on Schedule D and Form 8949 if necessary.

Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary. You report your total capital gains or losses on your Form 1040, line 7.

To take out and optimize your gains, sell 5-10% at a time, depending on how big your holdings are in that particular crypto. If the coin has gained more than 30% since you bought it, consider selling a small percentage every week.

Unfortunately, there is currently no authoritative literature under U.S. GAAP which specifically addresses the accounting for digital assets, including digital currencies. As a result, entities have considered accounting for them as cash, intangible assets, investments, or inventory.

So, when you buy Bitcoin or Ether, you should add it to your balance sheet at its fair market value on the date you bought it. Here, you'll need to debit your assets account. Likewise, if you bought Bitcoin or Ether with a fiat currency, you'll need to credit your cash account for the purchase price.

The most commonly used moving averages span over 50, 100 or 200 days. Traders keep a close watch on 50-day and 200-day moving averages.

With any kind of stock or fund, you want to be able to leave your money in the investment for at least three to five years. Since stocks can fluctuate a lot over short periods, try to allow the investment some time to grow and get over any short-term declines in price.

The 50 day and 200 day Moving Averages are the most frequently used by crypto traders. The result is usually displayed as a line graph set against the price.

Should I use average cost basis or FIFO? ›

From strictly a tax standpoint, the investor would be better off selecting the FIFO method or the high-cost method to calculate the cost basis before selling the shares. These methods would result in no tax on the loss.

Assuming that costs generally rise, FIFO will typically be more advantageous. You are free to change methods from year to year, but you must identify the method you used, and investors will want to see an explanation for changes in inventory methods.

Generally speaking, you'll want a higher basis since it will reduce your capital gains, but this option could pay off if you're taxed at long-term capital gains rates.

The best bet is to use a platform like Binance.us or FTX.us to save on fees, and quickly cash out your crypto for dollars. The mobile apps make it easy to sell, and you can connect your bank account to transfer funds after the crypto is sold.

Timing your transactions for low-use times will result in lower transaction fees. Generally blockchain networks tend to be busiest during hours when people in the U.S. are awake. Wait for off-peak hours if you need to save on transaction fees.

In other words, one of the primary advantages of HIFO accounting is that it has no downside risk; that is, the benefits are always positive when compared to average cost. The discussion thus far has been based upon the assumption that the accounts were completely exhausted through the retirement period.

Select then choose Profile & Settings. Select Taxes then choose Settings. Select the dropdown next to Cost-basis method. Select Keep HIFO method for all years if you've previously filed and paid taxes using this method and choose Confirm.

There's no tax for simply holding crypto. You'll only pay taxes in the event that you earned or disposed of cryptocurrency. It's important to report all of your taxable income from cryptocurrency on your tax return.

FIFO is used by most investors since it is considered the most conservative accounting method. While methods like HIFO and LIFO can reduce your tax bill, they should only be used if you've kept detailed records of your crypto transactions.

What is the best way to fund Coinbase? ›

Using a bank account is a great way to deposit funds or to purchase assets so that you can trade on Coinbase immediately, especially if you want to buy and sell with higher transaction limits.

The IRS defaults to the first in, first out (FIFO) method when determining cost basis (we'll come back to that), but it's not your only option. You can also use alternative “specific identification” methods, which may be more advantageous to you, depending on your portfolio and the overall market.

Yes, Coinbase reports to the IRS. It sends Forms 1099-MISC to the IRS for U.S. traders who made more than $600 in crypto rewards or staking. $600 is the Coinbase IRS reporting threshold for tax year 2022.

Taxable profit depends on the method selected

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.

Highest in, first out (HIFO) is a method of accounting for a firm's inventories wherein the highest cost items are the first to be taken out of stock. HIFO inventory helps a company decrease their taxable income since it will realize the highest cost of goods sold.

Reporting your crypto activity requires using Form 1040 Schedule D as your crypto tax form to reconcile your capital gains and losses and Form 8949 if necessary. You report your total capital gains or losses on your Form 1040, line 7.

Highest-in First-out is typically used by corporations looking to minimize their taxable earnings for a particular accounting period. HIFO allows for the costliest inventory to be sold first, regardless of when it was purchased, thereby driving up the value of the cost of goods sold, and lowering taxable earnings.

FiFo means "First-In, First-Out" and is a method used in inventory management to ensure that the first items entering an inventory are the first ones to leave when it comes time for shipping or sale. This helps to prevent wasting resources on old products and ensures that customers receive the freshest stock possible.

The disadvantages of using FIFO are that it increases the tax liability in periods of rising prices, it shows a lower net income and a higher cost of goods sold in periods of falling prices, and it may not accurately reflect the actual cost of production or operations.

What is the difference between HIFO and FIFO? ›

The proposed change is all about timing and two acronyms—HIFO and FIFO. HIFO stands for highest in, first out and FIFO stands for first in, first out. Under tax law at the time, investors with taxable accounts were free to choose which shares of a specific company they would like to sell.

LIFO is an inventory valuation technique, in which the last received stock of goods is issued first. FIFO is an inventory valuation technique, in which the first received stock of goods is issued first. IFRS, does not recommend the use of LIFO for valuing the inventory in accounting.

FIFO (first-in first-out), LIFO (last-in first-out), and HIFO (highest-in first-out) are simply different methods used to calculate cryptocurrency gains and losses.

Coinbase customers can manage their cost basis method in their tax center settings, where they can choose between a HIFO (highest in, first out), LIFO (last in, first out), and FIFO (first in, first out).

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.