ELI5 —Part 1: Crypto Taxation

  • …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

If you want to know how much you owe in taxes, there are really only two parameters that matter:

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

Lesson one: Inventory

In the crypto world, taxable income is not as clear cut as one would think. Especially when you don’t buy and sell everything at once. If you only invest once (at t=0), don’t do any trades and liquidate at the end (t=n), the calculation is fairly simple. Taxable income then becomes the difference between the money you invested in t=0 and the money you took out in t=n.

FIFO

The acronym stands for “first in, first out”. Whatever assets you have bought first get spent first. An obvious use of FIFO is the way lines of people in a supermarket usually work. The people first in line get served first.

LIFO

LIFO is the polar opposite of FIFO, meaning “Last in, first out”. This works like a stack of pancakes, where the last one you put on the pile gets eaten first.

FIFO and LIFO in Action

Imagine you bought 100 Bitcoin at $1 each and then you bought another 1 Bitcoin at $10,000. Not taking holding periods into account, if you now wanted to sell 1 Bitcoin at the current price of $3,500, you could either realize a gain of $3,499 that you would have to pay taxes for using FIFO (because you are selling one of the early 100 Bitcoins), or a loss of $6,500 using LIFO (because you are selling the last Bitcoin), that you could deduct from your investment income.

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

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