The Gist of FIFO Rules and Cryptocurrency

In Forex trading (foreign currency trading) there is a “first in first out” (FIFO) rule. This rule should be optional cryptocurrency.[1]

NOTE: This article implies “the FIFO rule shouldn’t apply by default and instead should be an optional method of calculating capital gains and losses in a tax year.” That doesn’t mean it can’t or doesn’t apply, it means it shouldn’t apply and should be optional. This applies to the United States only. As always, make your last stop an tax professional and/or official IRS documents, this is not professional legal or tax advice.

What is FIFO? FIFO stands for “first in first out.” It is a rule that has applied to Forex trading since 2009. For crypto it would mean that, of a given coin, you would have to sell your oldest holdings first and newest holdings last. So if you bought 100 BTC in 2009 and 10 in 2017, you would have to realize your gains from 2017 every time you traded in 2017 (thus eating into your long term capital gains rather than you choosing to trade your 2017 coins “first”). This would mean big tax bills for long term holders who traded this year. Luckily, there is no logical reason for the rules to apply. Learn more about FIFO and Forex.

Why The FIFO Rule Shouldn’t Apply to Crypto

With the above said, a FIFO rule was going to be added across the board for all investments in a 2017 U.S. tax reform bill, and thus it would have applied to crypto (as crypto is an investment property). However, the rule was excluded from the final bill.

Given that this rule was almost added, and that Forex (which is a bit like crypto) has FIFO rules, it is reasonable to be confused over whether or not FIFO rules apply to crypto.

The answer is, “FIFO rules should not apply to crypto as it stands now.”

That doesn’t mean they can’t or don’t, that only means, from what I can tell, there is no reason to assume they do (it doesn’t imply this in the regulations from what I can tell and there is no document suggesting that they would apply; the only unknown was the tax bill, and the FIFO provision was removed).

In other words, you shouldn’t be forced to sell the coins you have held longer before you sell the coins you have held for a shorter period of time.

The bottom line is:

  1. Cryptocurrency is treated as an investment property for tax purposes, unlike foreign currency. Thus, the rule should not apply on that level.
  2. Since the FIFO provision didn’t make it into the final version of the Senate tax bill, it should not apply on that level.
  3. Therefore, the FIFO rule should not apply to cryptocurrency.

With that said, there is room for the U.S. government to change the rules down the road. Also, you can choose to apply the FIFO rule if you wish. Learn more at Brave New Coin’s Capital gains on cryptocurrency: FIFO, LIFO, or Specific Identification?

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Citations

  1. FIFO Rule Excluded from Final Version of the Tax Bill