How To Calculate And Report Crypto Gains Using FIFO Method

Crypto taxation can be one of the most daunting aspects of cryptocurrency trading, but it doesn’t have to be. As the popularity of cryptocurrencies grows, so does the need for accurate tax reporting. When it comes to reporting crypto gains, the FIFO (First In, First Out) method is one of the most common ways to calculate your capital gains, and it’s recognized by tax authorities like the IRS.

For many crypto investors, calculating and reporting gains can become a confusing and time-consuming task, especially when it comes to keeping track of every transaction across multiple exchanges and wallets. Fortunately, CoinTracking can simplify this process by automating the tracking and reporting of your crypto transactions, using the FIFO method or other tax calculation strategies.

In this post, we’ll guide you through how to calculate and report your crypto gains using the FIFO method, and explain why CoinTracking is the perfect tool to help you stay on top of your tax obligations.

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Table of Contents

What is the FIFO Method for Crypto Tax Reporting?

FIFO, or First In, First Out, is a method used to calculate the cost basis of your crypto assets when determining capital gains. Here’s how it works:

The first assets you acquire (i.e., the “first in”) are the first assets you sell or dispose of (i.e., the “first out”).
For tax purposes, this means that when you sell a portion of your crypto holdings, you’ll use the cost basis of the oldest acquired units to calculate your gains.

For example, let’s say you bought 1 Bitcoin (BTC) for $10,000 in January and another Bitcoin for $15,000 in June. If you sell 1 BTC in December, FIFO dictates that you will use the $10,000 cost basis (the first BTC you bought) to calculate your capital gains.

FIFO is particularly useful for tax purposes because it simplifies the calculation process and is widely accepted by tax authorities. However, the FIFO method might not always be the most advantageous approach, especially if the price of the crypto you hold has increased significantly. In such cases, using FIFO may result in higher capital gains and, therefore, higher taxes.

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How to Calculate Crypto Gains Using the FIFO Method

Calculating your crypto gains using the FIFO method involves determining the cost basis of each asset you sold or disposed of, and then calculating the capital gains based on the difference between your cost basis and the sale price.

Here’s a step-by-step guide on how to calculate your crypto gains using the FIFO method:

Step 1: Track Your Purchases

The first step is to gather all the relevant information about your crypto purchases. This includes:

The date of each purchase
The amount of cryptocurrency purchased
The price at which you bought it (the cost basis)

To make this process easier, you should record your purchases on a spreadsheet or use a tool like CoinTracking that automatically tracks your transactions. CoinTracking allows you to import transactions from exchanges and wallets, which saves you from manually entering each purchase.

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Step 2: Track Your Sales or Disposals

Next, you’ll need to track any sales or disposals of cryptocurrency. This includes:

The date you sold or disposed of the crypto
The amount of cryptocurrency sold
The price at which you sold it

Again, you can manually track this information, but using CoinTracking allows for automatic tracking of these transactions as well, ensuring you don’t miss anything. CoinTracking integrates with exchanges and wallets to automatically import your sell orders, providing you with a clear overview of your entire crypto portfolio.

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Step 3: Apply the FIFO Method

Once you have your purchases and sales recorded, it’s time to apply the FIFO method:

Take the first asset you bought (the earliest purchase).
When you sell or dispose of cryptocurrency, subtract the number of units you sold from the first purchase.
If you sell more than one batch of crypto, continue to the next batch of purchases until the sale is fully accounted for.

For example:

You buy 1 BTC for $10,000 in January.
You buy 1 BTC for $15,000 in June.
You sell 1 BTC for $20,000 in December.

According to FIFO, you’ll use the $10,000 purchase to calculate the capital gain for the sale. Your capital gain would be:

Sale price: $20,000
Cost basis: $10,000 (the first BTC you bought)
Capital gain: $20,000 – $10,000 = $10,000

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Step 4: Calculate Capital Gains

After determining the cost basis for each sale, you can calculate the capital gains or losses:

Capital Gains: This is the difference between the sale price and the cost basis (if the sale price is higher than the cost basis).
Capital Losses: If the sale price is lower than the cost basis, the difference is considered a capital loss.

In the example above, you sold 1 BTC for $20,000, which was purchased for $10,000. This results in a capital gain of $10,000.

CoinTracking will automatically calculate your capital gains for you once your transactions are synced. This can save you significant time and effort when preparing for tax season.

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Step 5: Report Your Crypto Gains on Your Tax Return

Once your gains and losses have been calculated using FIFO, you can report them on your tax return. The IRS requires you to report capital gains and losses on Schedule D of your tax return. The information from your capital gains calculation will help you complete this form accurately.

Using CoinTracking, you can generate tax reports that include all the necessary information for your Schedule D, including:

The date of purchase and sale
The cost basis of each transaction
The capital gain or loss for each transaction

This ensures that your tax filing is accurate and complete, helping you avoid costly mistakes or audits.

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Why Choose CoinTracking for FIFO Tax Reporting?

CoinTracking is one of the best tools available for calculating and reporting your crypto gains using the FIFO method. Here are some of the reasons why you should consider using CoinTracking:

1. Automatic Transaction Imports

CoinTracking connects with over 75 exchanges and wallets, allowing you to automatically import your transaction data. This eliminates the need for manual entry and ensures that all of your crypto purchases and sales are accounted for.

2. FIFO Method Support

CoinTracking supports the FIFO method of tax calculation, ensuring that you’re following the correct tax rules. Whether you’re calculating gains on Bitcoin, Ethereum, or any other cryptocurrency, CoinTracking can help you apply FIFO accurately.

3. Comprehensive Tax Reports

CoinTracking can generate comprehensive tax reports that include capital gains, losses, and other tax-relevant information. These reports are designed to help you file your taxes with ease, and can be exported in a variety of formats for your convenience.

4. Easy to Use

CoinTracking’s user-friendly interface makes it easy to track your crypto transactions and calculate your gains and losses. Even if you’re new to crypto tax reporting, CoinTracking simplifies the process.

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Conclusion: Make FIFO Tax Reporting Simple with CoinTracking

Calculating and reporting your crypto gains using the FIFO method doesn’t have to be a daunting task. With the help of CoinTracking, you can automate the entire process, saving time and reducing the risk of errors. By syncing your wallets and exchanges with CoinTracking, you’ll have all your transaction data in one place, making tax reporting a breeze.

Whether you’re new to crypto or a seasoned trader, CoinTracking is the perfect tool to help you stay on top of your taxes. So, don’t wait until the last minute—start using CoinTracking today and make crypto tax season stress-free!