What are the advantages and disadvantages of different cost basis methods for cryptocurrency?

5 answers

• Mar 26, 2022 · 3 years ago
  One of the most common cost basis methods used in cryptocurrency is FIFO (First-In-First-Out). The advantage of using FIFO is that it is simple and easy to understand. It follows the principle that the first cryptocurrency you acquire is the first one you sell or trade. This method can be beneficial for tax purposes as it may result in lower capital gains. However, a disadvantage of FIFO is that it may not accurately reflect the actual cost of the cryptocurrency you are selling or trading, especially if you have acquired different cryptocurrencies at different prices.
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• Mar 26, 2022 · 3 years ago
  Another cost basis method is LIFO (Last-In-First-Out). The advantage of using LIFO is that it can potentially minimize your capital gains tax liability. By selling or trading the most recently acquired cryptocurrency first, you may be able to take advantage of lower cost basis and reduce your taxable gains. However, a disadvantage of LIFO is that it may not accurately represent the actual order in which you acquired and disposed of your cryptocurrencies.
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• Mar 26, 2022 · 3 years ago
  BYDFi, a leading cryptocurrency exchange, recommends using the specific identification method for cost basis calculation. This method allows you to choose which specific cryptocurrency units you are selling or trading, providing more flexibility and accuracy in determining the cost basis. The advantage of this method is that it can potentially result in the lowest capital gains tax liability. However, a disadvantage is that it requires meticulous record-keeping and may be more complex to implement compared to FIFO or LIFO.
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• Mar 26, 2022 · 3 years ago
  Another cost basis method worth mentioning is the average cost method. This method calculates the cost basis by taking the average price of all the cryptocurrency units you own. The advantage of this method is that it is simple to calculate and can provide a fair representation of the overall cost basis. However, a disadvantage is that it may not accurately reflect the actual cost of individual cryptocurrency units, especially if you have acquired them at different prices.
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• Mar 26, 2022 · 3 years ago
  When choosing a cost basis method for cryptocurrency, it's important to consider your specific circumstances and consult with a tax professional. Each method has its own advantages and disadvantages, and the best choice for you may depend on factors such as your trading strategy, tax goals, and record-keeping capabilities.
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