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  1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

The fact that bitcoin traders have the right to calculate their cost bases using one of several different methodologies makes the questions of tax reporting and enforcement even more complicated. Because bitcoin is taxed as personal property, investors have the option to sell their assets on a First-In-First-Out (FIFO) basis, a Last-In-First-Out (LIFO) basis, or they can sell specific tax lots that are most efficient via the “specific share identification” method that is commonly used in stock trading. Which of these options a trader decides to use may have a major impact on the calculations of both long- and short-term capital gains.

 

Imagine that our sample investor Max (who is in the 25% income-tax bracket) has made the following bitcoin purchases:

 

Lot Date

BTC

Cost Basis

Price Now

Gain (Loss)

Oct. 1, 2012

100

$10

$5,710

$570,000

Nov. 16, 2016

10

$745

$5,710

$49,650

June 29. 2017

1

$2,470

$5,710

$3,240

 

 

Next, pretend that Max decided to sell off his bitcoins based on news out of China that digital currency exchanges were being shut down. He would have the option of selling his longest-held bitcoins (FIFO method), which would allow him to benefit from a lower long-term capital gains rate. He could also sell his shortest-held bitcoins (LIFO method), which would realize a lower nominal gain. The implications for his taxes due would be significant, depending upon the choice he makes.

 

Certain digital currency exchange platforms automatically incorporate FIFO or LIFO methods for investor clients, regardless of whether one method or the other (or neither) is the most tax-friendly means of tracking cost basis. Investors might prefer to sell off a set of bitcoins purchased at a different time as a means of writing off ordinary income, then sell a different lot in order to realize a smaller long-term capital gain. The result can be significant tax savings based on a straightforward and legal change in personal accounting.

 

Practically, though, “specific identification” sub-accounting could be either out of the hands of the individual investor or impossible. It’s unlikely that exchanges and wallets will work to ensure that trades are executed in a way that optimizes tax returns. An investor would have to specify exactly which bitcoins to sell and at which time, keeping track of any new transactions with time-stamps in the process. Combining different wallet addresses into a single account, for example, could completely jeopardize this process. The result is that the entire process of keeping track of bitcoin trades for tax purposes is incredibly complicated, and it’s likely that many individual investors (regardless of whether they have help from tax professionals) will incur unnecessary tax liabilities in the process.


Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
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