The way you account for cryptocurrency transactions can change your tax obligations significantly. This is because the type of cryptocurrency accounting method you apply directly affects your tax savings. Crypto tax accountants have the necessary skills and expertise to choose the most tax-efficient accounting method to suit your crypto finances. Whether you are an investor, trader, or miner, it’s advisable to consult a crypto CPA or a professional crypto tax accountant to choose the best cryptocurrency accounting method for tax reporting.
First In, First Out (FIFO) Method
The FIFO method assumes that the first crypto purchased is also the first one that you’d either be selling or using. The FIFO method is the most widely used crypto accounting method since it is straightforward and similar to general accounting principles. Compared to other digital asset accounting methods, FIFO is more conservative and is considered the default accounting method.
The FIFO method is ideal for long-term investors who plan to hold crypto without selling for more than a year to take advantage of the lower tax rates that come with long-term capital gains. This is because FIFO disposes of your longest-held cryptocurrency first.
Last In, First Out (LIFO) Method
As suggested by the name, LIFO assumes that the most recently acquired cryptocurrency is the first to be sold or used. When you hire a crypto cpa, they analyze whether to use the FIFO or LIFO accounting method depending on the market value for crypto. This digital asset accounting method is useful to offset gains by using higher-cost purchases.
Therefore, the LIFO method is ideal for active traders who buy and sell cryptocurrencies within short timeframes. Since taxable gains can be reduced by using higher-cost coins in a bull market, active traders have the advantage of getting to reinvest more capital in future crypto transactions.
However, implementing these digital asset accounting methods should be done carefully with advice from professional crypto CPAs who are experienced in handling a wide range of crypto transactions in different crypto markets.
Highest In, First Out (HIFO) Method
HIFO is a digital asset accounting method that crypto tax accountants apply mostly for advanced traders and businesses, especially those offering crypto mining accounting services. Unlike the default accounting method, FIFO, this crypto accounting method requires precise transaction records and documentation to be done by crypto tax accountants.
Miners use crypto mining accounting services for this purpose as they engage in frequent transactions that need to be recorded accurately in order to apply the HIFO accounting method. Advanced traders don’t mind making this investment since HIFO is a powerful tax-saving strategy, especially in markets where crypto prices rise rapidly.
With proficient crypto mining accounting services, you can sell high-cost coins first as per the HIFO method and reduce taxable gains while retaining lower-cost crypto assets for future sales. While HIFO is an advantageous accounting method for a rising market, it is necessary to get guidance from professional crypto CPAs as detailed financial reporting should be done in line with IRS guidelines to ensure that your business is in compliance with tax laws and regulations.
Crypto CPAs who are experienced in crypto accounting regularly update themselves on global legal requirements related to crypto financing and tax laws related to crypto taxation. This knowledge is essential for choosing the most suitable crypto accounting method for your business that ensures lowered tax bills while staying compliant.
