![]() Not all cryptocurrency profits are earned by trading and earning capital gains, so there’s a whole other category of crypto taxes to consider! You might be earning coins in a game, or you might simply have random coins show up in your wallet. Even though these accounting methods may be offered in your crypto tax software, the IRS is unlikely to support LIFO or HIFO unless you have enough documentation to specifically ID your coins. You may have also heard of LIFO (last in, first out) or HIFO (highest in, first out). It is possible to use specific ID for some transactions while using FIFO for everything else. NFTs, by nature, require specific ID accounting. This allows you to lower capital gains by identifying the specific coin that was used in a transaction, but it requires special accounting (ask our crypto tax attorneys for more information). Specific ID can also be used in some cases. FIFO means crypto is sold in the same order you bought it. The IRS guidance generally advises taxpayers to use FIFO (first in, first out). Depending on the software you choose, multiple accounting methods may be offered. You can use a cryptocurrency tax accounting software to pull in your transaction history and automatically determine your cost basis, sales proceeds, and holding period. So how can you tell how much you initially paid for it? When you sell or dispose of crypto, it’s not always obvious which coin (or fraction of a coin) was used. How to Figure Out Cost Basis for Crypto Capital Gains: FIFO, LIFO, HIFO, and Specific ID The IRS has clarified that if all you did was purchase cryptocurrency with USD, you do not need to check “yes.” Otherwise, almost any involvement with crypto requires a “yes.” ![]() You must also attach a full crypto tax report to your return showing all of your trades. If the answer is yes, you must answer truthfully or risk penalties or even criminal tax charges. It asks: “At any time during, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS crypto question is the first question on your tax return, right beneath name and address. How Should I Answer the IRS Crypto Question? There are different taxable events for each of these. Generally, two types of tax apply to cryptocurrency (including Bitcoin, altcoins, NFTs, and sometimes utility tokens): capital gains tax and income tax. There are varying tax rates depending on each situation. ![]() If you’re wondering what the cryptocurrency tax rate is, it’s not a clear-cut answer. ![]() A taxable event is something that triggers a reporting requirement. Unfortunately, that means most transactions with cryptocurrency create what we call a taxable event. Crypto taxes are similar to taxes on stocks it’s treated as property, not currency, for tax purposes. ![]()
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