Dealing with crypto accounting can sometimes give you a real headache. With the constant ups and downs in the value of digital assets, keeping track of everything feels overwhelming. Therefore, choosing the correct accounting method becomes even more critical when you realise how much it affects your taxes and financial records.
You might wonder, “Which method should I use?” The answer can be complicated. Each method—FIFO, HIFO, LIFO, or something else—has rules and impacts. Understanding these methods is critical to making informed decisions and avoiding costly mistakes.
This article will break down the most common crypto accounting methods, making it easy to understand which one fits your needs. Whether you’re just starting or have been investing in crypto for a while, this guide will help you confidently navigate the complex world of crypto accounting.
What Are Crypto Accounting Methods?
Crypto accounting methods help you manage the way you track and report your cryptocurrency transactions. When you buy cryptocurrency at different times and prices, figuring out your gains or losses can get tricky. That’s where these methods come in.
Each method offers a different way to calculate the value of the crypto you’re selling. For example, you bought Bitcoin at several different prices over time. When you decide to sell some of your crypto, you must know which purchase to base your sale on. This choice will affect your taxable gains or losses.
Types Of Crypto Accounting Methods
Knowing which coins you’re selling can be confusing when you own multiple pieces of cryptocurrency. That’s where crypto accounting methods come in. Each method can affect how much tax you owe and your investments’ overall profit or loss. Let’s break down these methods:
First In First Out (FIFO)
FIFO stands for First In, First Out. This method assumes that the first units of cryptocurrency you purchase are the first ones you sell. It’s like the saying, “Out with the old, in with the new.” This is one of the most popular methods because it’s easy to understand and apply.
From a taxpayer’s perspective, using the FIFO method can benefit you because it allows them to apply long-term Capital Gains Tax discounts, which typically have lower rates than short-term Capital Gains Tax rates.
Example
Rahul bought three Ethereum at different time intervals and different prices given below:
- 1 ETH at INR 1,00,000 on 5th May 2024
- 1 ETH at INR 2,25,000 on 15th May 2024
- 1 ETH at INR 2,15,000 on 25th May 2024
He sold one ETH for INR 3,00,000 on June 5, 2024. As per FIFO, the ETH token’s cost basis will be INR 1,00,000, which he purchased first on May 5, 2024.
Capital Gains = INR 3,00,000 – INR 1,00,000 = INR 2,00,000
Hence, his capital gains become INR 2,00,000.
Preferred By Countries
The following countries prefer FIFO:
- Austria
- Australia
- Brazil
- Germany
- India
- Switzerland
- Spain
- USA
Last In First Out (LIFO)
The Last In, First Out (LIFO) cost basis method operates in contrast to FIFO. Instead of considering the cost of the first asset you bought, LIFO uses the price of the recently purchased asset.
The advantages and disadvantages of the LIFO method are essentially the reverse of FIFO. With LIFO, you might face higher short-term Capital Gains Tax rates.
However, you could pay less tax overall if your most recent assets have appreciated less. Given the volatile nature of the crypto market, using LIFO might lead to greater capital losses in some cases, and these losses are not taxable.
Example
Rahul bought three Ethereum at different time intervals and different prices given below:
- 1 ETH at INR 1,00,000 on 5th May 2024
- 1 ETH at INR 2,25,000 on 15th May 2024
- 1 ETH at INR 2,15,000 on 25th May 2024
He sold one ETH for INR 3,00,000 on June 5, 2024. As per LIFO, the ETH token’s cost basis will be INR 2,15,000, which he purchased first on May 25th, 2024.
Capital Gains = INR 3,00,000 – INR 2,15,000 = INR 85,000
Hence, his capital gains become INR 85,000
Preferred By Countries
The following countries prefer LIFO:
- USA
- New Zealand
- Switzerland
Highest In First Out (HIFO)
HIFO stands for Highest In, First Out. This cost-basis method focuses on the purchase price of an asset rather than when you bought it.
It assumes that the cryptocurrency units with the highest purchase price are sold first. This method can help lower your capital gains tax by selling the most expensive coins first.
However, some countries do not permit investors to use the HIFO cost basis when calculating their capital gains.
Example
Rahul bought three Ethereum at different prices given below:
- 1 ETH at INR 1,00,000
- 1 ETH at INR 2,25,000
- 1 ETH at INR 2,15,000
He sold one ETH for INR 3,00,000. As per HIFO, the ETH token’s cost basis will be INR 2,25,000:
Capital Gains = INR 3,00,000 – INR 2,25,000 = INR 75,000
Hence, his capital gains become INR 75,000.
Preferred By Countries
The following countries prefer HIFO:
- USA
- New Zealand
- Switzerland
Average Cost Basis Method (AVG)
The Average Cost Method (AVG) method simplifies things by avoiding the need to track each purchase individually.
To calculate your cost basis using ACB, you must determine the average cost of all your assets. This is done by dividing the total amount you spend to purchase your assets by the total number of coins or tokens you hold.
Example
Rahul bought three Ethereum at different time intervals and different prices given below:
- 1 ETH at INR 1,00,000 on 5th May 2024
- 1 ETH at INR 2,25,000 on 15th May 2024
- 1 ETH at INR 2,15,000 on 25th May 2024
On June 5, 2024, he sold one ETH for INR 3,00,000. According to AVG, the ETH token’s cost basis will be INR 1,80,000, the average of all three prices.
Capital Gains = INR 3,00,000 – INR 1,80,000 = INR 1,20,000
Hence, his capital gains become INR 1,20,000
Preferred By Countries
Countries that use the average cost basis method include
- Australia
- Brazil
- Canada
- UK
- France
- Japan
- Switzerland
However, these countries may have different names for this accounting method and may include additional rules. For example, the UK uses the Share Pooling method, an average cost basis method with integrated wash sale rules. France uses the Weighted Average Acquisition Price (PMPA), and Japan offers the Moving Average or Total Average Method. While these methods are similar to the average cost basis method, they each have their unique characteristics.
Conclusion
Choosing the proper crypto accounting method is essential for managing your investments and taxes. Whether you pick FIFO, LIFO, HIFO, or AVG each technique tracks how much money you make or lose when you sell your cryptocurrency.
Knowing the basics of these accounting methods allows you to keep better track of your crypto and feel more confident in your choices. To make this even easier, try using a tool like KoinX, a crypto tax calculator that helps you calculate your taxes quickly and accurately. With KoinX, you can keep track of your crypto transactions and gains with a comprehensive portfolio tracker.
So why wait? Join KoinX today and make your crypto taxes easier.
