What is First In, First Out?
Let's find out First In, First Out meaning, definition in crypto, what is First In, First Out, and all other detailed facts.
First In, First Out (FIFO) is a method of inventory management used to make the process of calculating taxes easier. If a US taxpayer is unable to identify a unit of cryptocurrency due to lacking information, it is recommended that they follow the procedure of the Specific Identification Method.
Whenever a taxpayer receives or relinquishes their crypto assets, depending on the transaction type, they may be liable for capital gains tax or income tax. Crypto assets can be taxable. Taxpayers must pay for any profits made while trading crypto assets, or on the interest from their crypto holdings.
With the FIFO method, the sales of crypto assets are recorded following the same chronological order as when they were bought. According to the Rev. Rul. 2019-24 tax guidance report by the IRS, First In, First Out, and Specific Identification are the recommended calculation methods for tax purposes.
The IRS determines the tax amount based on how long the crypto asset was held before it was sold. Assets that were held for over a year may be eligible for long-term capital gain discounts.
FIFO is considered to be one of the most common inventory management methods. It is recommended for those who want to file taxes on their cryptocurrency earnings but do not meet the criteria for Specific ID.
The IRS requires taxpayers to calculate the capital gains for each transaction involving cryptocurrencies. These transaction types include buying, selling, and trading. Taxpayers can follow the standard methodology to calculate the cost basis (the amount paid to earn the crypto assets) from their proceeds (earnings).
The values of crypto-crypto transactions must be calculated in USD. Any fees associated with the trade can be included in the cost basis.
If the customer purchased one crypto coin in 2017 for $2000, another in 2018 for $2500, and ended up selling one of the coins in 2021 for $4000, they can use the FIFO method to calculate the overall capital gains. In this case, the first coin from 2017 is sold, setting the gains at $2000 ($4000-$2000).