Gains

When a customer disposes of assets, a gain or loss for each tax lot used to fill that disposition is tracked and stored. Each individual entry is referred to as a "Gain Item." For example, let's consider an individual's inventory that consists of 1.5 BTC purchased a year ago and 0.5 BTC purchased last week. If a user sells 2 BTC today, this sell transaction will result in two separate gain items being recorded - one gain item for the 1.5 BTC and another for the 0.5 BTC. Each gain item will need to be separately reported on the Form 1099-B.

Gain/Loss:

The gain or loss is the amount by which the sale price of an asset exceeds or is less than its cost basis. Gains are typically subject to taxation, while losses can be used to offset gains and potentially reduce taxable income.

Holding Period:

The holding period refers to the length of time an asset is held before it is sold. In the United States, assets held long term receive preferential tax treatment compared to short-term assets.

Long-Term:

For US taxpayers, long-term refers to assets held for more than one year. Long-term gains are subject to lower tax rates than short-term gains.

Short-Term:

For US taxpayers, short-term refers to assets held for one year or less. Short-term gains are subject to higher tax rates than long-term gains.

Realized Gain/Loss:

Realized gain or loss refers to gains or losses that have been actually realized through the sale or disposition of an asset.

Unrealized Gain/Loss:

Unrealized gain or loss refers to gains or losses that have accrued due to the fluctuation in the price of an asset but have not yet been realized through the sale or disposition of that asset.

Wash Sale:

A wash sale is a type of transaction in which an investor sells an asset at a loss and then repurchases the same asset within a certain timeframe. These transactions are not allowed to be used to generate a tax loss. Currently, wash sale rules do NOT apply to digital assets.

Accounting Methods

HIFO: Highest In, First Out

HIFO (Highest In, First Out) is an accounting method used to calculate the cost basis of assets, particularly for tax purposes. It is commonly used in investments involving stocks, cryptocurrencies, and securities. The HIFO method assumes that the highest-priced units or shares are sold first when determining the cost basis of an asset sold or disposed of.

Here's a simplified example to demonstrate how HIFO works:

Suppose an investor purchases shares of a stock on three different occasions:

  1. Purchase 1: 10 shares at $10 per share
  2. Purchase 2: 20 shares at $12 per share
  3. Purchase 3: 15 shares at $15 per share

If the investor sells 25 shares, the HIFO method determines the cost basis as follows:

  • The 15 shares from Purchase 3 would be sold first, with a cost basis of $15 per share.
  • The remaining 10 shares would be selected from Purchase 2, with a cost basis of $12 per share.

By using HIFO, the investor assigns the highest purchase prices to the shares sold, potentially resulting in a higher cost basis and lower taxable gains or capital gains taxes.

FIFO: First In, First Out

FIFO (First In, First Out) is an accounting method used to determine the cost basis of assets, primarily in inventory management and the sale of goods. FIFO assumes that the first units or items purchased are the first ones sold or consumed.

Under the FIFO accounting method, when an asset is sold or used, the cost basis is based on the earliest acquisition cost. The cost of the oldest units or items in inventory is used to calculate the cost of goods sold (COGS) or the cost basis of assets that are sold or disposed of.

Here's a simplified example to illustrate how FIFO works in inventory management:

Suppose a business purchases a specific product at different prices over time:

  1. Purchase 1: 10 units at $5 per unit
  2. Purchase 2: 20 units at $7 per unit
  3. Purchase 3: 15 units at $9 per unit

If the business sells 25 units, the FIFO method considers the cost basis as follows:

  • The first 10 units from Purchase 1 would be sold, with a cost basis of $5 per unit.
  • The remaining 15 units would be selected from Purchase 2, with a cost basis of $7 per unit.

By using FIFO, the cost of the earliest inventory purchases is allocated to the units or items sold, potentially resulting in a different cost basis and inventory valuation compared to other accounting methods.

FIFO is commonly used in industries where the value of inventory can change significantly over time, such as retail, manufacturing, and distribution. It is also widely accepted for calculating the cost basis of securities for tax purposes in many jurisdictions.