Track the cost basis of each inventory pool accurately and select the tax calculation method that is most beneficial to you.
What are the different tax calculation methods available to crypto investors?
1. First-in-first-out (FIFO)
First in first out is a method of calculation wherein it is assumed that the oldest coins in a client’s portfolio have to be sold first. The costs paid for those oldest coins are the ones used in the calculation.
2. Last-in-first-out (LIFO)
Last in first out is a method of calculation wherein it is assumed that the most recent coins added to a portfolio have to be sold first.
3. Highest-in-first-out (HIFO)
Highest in first out is a method of calculation wherein the highest cost coins are the first to be taken out of inventory pools. HIFO based inventory calculations help clients decrease their taxable gains since it will realize the highest cost of coins sold.
Selecting the right calculation method is a very crucial step for every investor because this can help reduce taxable gains/losses drastically. It is similar to inventory management, however, transferring coins from one platform to the other makes it difficult for investors to keep track of the original cost basis of every coin pool.