ELI5 —Part 1: Crypto Taxation

This article is for you if you…

  • …want to understand how your crypto assets are measured
  • …didn’t study business administration or accounting and have never heard about Fifo or Lifo
  • …want to get a better understanding of inventory methods
  • …DID study business administration but fell asleep during accounting 101

The Fundamental Truth of Taxation

  1. How much money you own relative to the last time you filed taxes
  2. Your tax rate

While this seems easy enough, both of those parameters have a whole megillah of buts, ifs and whiles to consider. There are libraries filled with books about definitions of “money”, “tax rate” or even the meaning of “the last time you filed taxes”.

In this article, we are going to talk about the different ways to determine the most important parameter (your taxable income).

Lesson one: Inventory

Depending on whether you’ve made gains or losses, you either have to pay taxes on your gains, or you can deduct them from your taxable income.

But if you want to buy and sell different assets at different times, this calculation becomes much harder.

In order to correctly determine your income, you can borrow methods from classical inventory such as FIFO and LIFO. We have created a much more in-depth article about FIFO and LIFO here, feel free to check it out.

FIFO

That way, the time between buy and sell is always the longest possible. This is especially useful if you have a holding period after which crypto assets do not count towards your taxable income. In Germany for example, if you hold a currency for more than one year, gains do not count towards your taxable income.

Especially with the consideration of holding periods, FIFO accounting can be very favorable for investors as older investments might have lower tax rates than newer ones.

LIFO

This inventory method is great if you are looking to extend the holding duration of your earlier investments.

FIFO and LIFO in Action

Which inventory method is the right one for you of course depends on your specific situation. Accointing can give you a much better overview on your current status and give you a much better understanding of your current gains and losses.

With its tax optimizer, Accointing can also propose different scenarios for your portfolio depending on what your current requirements are.

For an in depth explanation and example of LIFO and FIFO click here.

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Connecting Crypto: Track, Manage, and Report all Your Crypto Platforms in One Place.