#First In, First Out (FIFO)
First In, First Out (FIFO) is an accounting method for tracking the cost of goods sold and inventory on hand. It is used to determine the value of a company’s inventory by valuing items that were purchased first at the lower cost before any subsequent purchases. FIFO is also commonly used in cryptocurrency trading as it helps investors track their gains and losses from trades more accurately.
When using FIFO in cryptocurrency trading, it means that when you sell your coins or tokens, they are valued based on what you paid for them initially. This allows traders to accurately calculate their realized capital gains or losses from each trade and report these amounts on their taxes accordingly. For example, if you buy one Bitcoin at $10k then later purchase another one at $15k and then sell both Bitcoins at $17k each, with FIFO your profit would be calculated as such:
Initial Purchase 1: -$10k
Initial Purchase 2: -$15K
Total Cost Basis = -$25K
Sale #1 = 17k – 10K = +7K Profit
Sale #2 = 17K – 15K = +2K Profit
Net Profit/Loss : +9 K total gain
Without using this methodology, some traders may mistakenly assume that all profits should be calculated against the most recent purchase price of $15k per coin which would lead to an incorrect calculation of only a 4 k net gain instead of 9 k . As you can see , correctly applying FIFO can make a significant difference in how much capital gain/losses must be reported come tax time!
When working with cryptocurrencies it’s important to remember that not all exchanges support this type of accounting system so it’s best to do research ahead of time to ensure accuracy when reporting profits or losses from trades made thereon. Additionally , taxpayers need to keep records off all transactions involving crypto-assets so they have accurate documentation needed for filing returns properly regardless if an exchange uses FIFO or not .
