First in, First Out (FIFO) is an inventory method used to determine the cost basis for tax calculations, particularly in cryptocurrency.
It is recognized and approved by the IRS and is implemented in various tax jurisdictions worldwide.
With FIFO, the first coins you purchase are considered the first ones sold when calculating the cost of goods sold (COGS) and the associated taxes on profits.
What Is First In, First Out?
First In, First Out (FIFO) is an inventory method the IRS recommends for calculating the cost-basis of cryptocurrencies when specific identification of units is impossible due to missing or unavailable information (as stated in IRS Notice 24).
You must pay taxes if you have engaged in profitable trading or earn interest from your crypto holdings.
Accounting for Cryptocurrency Gains
Using the FIFO method means that your assets are assumed to be sold in the same order as you acquired them. In its cryptocurrency tax guidance report (Rev. Rul. 2019-24), the IRS has classified FIFO and Specific Identification as the recommended methods for calculating cost basis.
Strategies for Crypto Taxation
It’s important to note that the IRS determines the amount of tax based on the holding period of the cryptocurrency before selling.
There may be long-term capital gain discounts for assets held for more than one year.
If you must report your crypto earnings and do not meet the requirements for Specific Identification, choosing FIFO is advisable as it is the most commonly used inventory method and follows a conservative accounting approach.
FIFO Method for Crypto Taxes
To calculate your cryptocurrency taxes using FIFO, the IRS instructs you to determine the capital gains for each transaction (buying, selling, trading) involving cryptocurrencies.
This involves subtracting the cost basis from the proceeds, where proceeds refer to the amount received and cost basis refers to the amount paid to acquire the cryptocurrency.
If the transaction involves crypto-to-crypto, you must determine the values in USD. Additionally, if the trade had associated fees, you can include them in your cost basis.