Capital Gains Taxes - How do you know which BTC or ETH was sold?

[bitquad]

Hi,

Let's say you purchase crypto assets via a dollar cost average method every month for 5 years. Or you mined BTC or ETH (when it was POW) over a period of 5 years. Each month your BTC or ETH balance increases. The asset prices go up and down during this period. Which means your purchase price varies over this time period.

Then in the 6th year you cash out say 1 BTC or 10 ETH. How do you determine which BTC or ETH you just sold? Was it the BTC / ETH you bought / mined in the first year? Or the second, third, fourth or fifth years? If you mined BTC / ETH I understand that you have to pay income tax at the price you were paid every year. The capital gains tax is what confuses me. There is no way to tell when you sell BTC or ETH, at which year it was acquired. It's just all pooled into one wallet.

Example:

Year 1:
Bought 1 BTC for $20,000

Year 2:
Bought 1 BTC for $30,000

Year 3:
Bought 1 BTC for $15,000

Year 4:
Bought 1 BTC for $10,000

Year 5:
Bought 1 BTC for $12,000

Balance after 5 years:
5 BTC

Year 6:
Sell 1 BTC for $25,000.

What is your capital gains tax? Which BTC is used to calculate the capital gains tax? Year 1, 2, 3, 4, 5?

[1714602029]

1714602029

[1714602029]

1714602029

[1714602029]

1714602029

[1714602029]

1714602029

[1714602029]

1714602029

[bitquad]

They mention the cost basis in this article.

But when you sell your crypto, is there a place where you can enter the cost basis of the asset? Can you say this BTC had a cost basis of $30,000?

https://www.investopedia.com/ask/answers/07/calculategains.asp

[bitquad]

Edit: I found this link which is helpful. Still not sure how to actually implement it.

Examples of using each cost basis accounting method
Let's assume that an investor purchases 5 BTC over time, with the following prices and dates of purchase:

- January 1, 2021: 1 BTC for $10,000

- February 1, 2021: 1 BTC for $12,000

- March 1, 2021: 1 BTC for $9,000

- April 1, 2021: 1 BTC for $15,000

- May 1, 2021: 1 BTC for $18,000

The investor sells 3 BTC on September 1, 2021, each for $20,000 for a total of $60,000

Using FIFO:

Under FIFO, the investor will sell the first three BTC purchased: those bought on January 1, February 1, and March 1. The cost basis will be calculated by adding the purchase prices of those three units as follows:

- Cost basis = ($10,000 + $12,000 + $9,000) = $31,000.

The profit realized on the sale will be:

- Profit = $60,000 - $31,000 = $29,000

Using LIFO:

Under LIFO, the investor will sell the three most recently purchased units: those bought on March 1, April 1, and May 1. The cost basis will be calculated by adding the purchase prices of those three units as follows:

- Cost basis = ($9,000 + $15,000 + $18,000) = $42,000.

The profit realized on the sale will be:

- Profit = $60,000 - $42,000 = $18,000

Using HIFO:

Under HIFO, the investor will use the three highest-cost Bitcoins as follows:

- Cost basis = ($18,000 + $15,000 + $12,000) = $45,000

The profit realized on the sale will be:

- Profit = $60,000 - $45,000 = $15,000

As you can see, each cost basis accounting method results in a different profit and tax liability for the investor. It's important to understand the pros and cons of each method and choose the one that works best for your specific situation.

https://www.accointing.com/en-US/blog/crypto-cost-basis

[paxmao]

Hi,

Let's say you purchase crypto assets via a dollar cost average method every month for 5 years. Or you mined BTC or ETH (when it was POW) over a period of 5 years. Each month your BTC or ETH balance increases. The asset prices go up and down during this period. Which means your purchase price varies over this time period.

Then in the 6th year you cash out say 1 BTC or 10 ETH. How do you determine which BTC or ETH you just sold? Was it the BTC / ETH you bought / mined in the first year? Or the second, third, fourth or fifth years? If you mined BTC / ETH I understand that you have to pay income tax at the price you were paid every year. The capital gains tax is what confuses me. There is no way to tell when you sell BTC or ETH, at which year it was acquired. It's just all pooled into one wallet.

Example:

Year 1:
Bought 1 BTC for $20,000

Year 2:
Bought 1 BTC for $30,000

Year 3:
Bought 1 BTC for $15,000

Year 4:
Bought 1 BTC for $10,000

Year 5:
Bought 1 BTC for $12,000

Balance after 5 years:
5 BTC

Year 6:
Sell 1 BTC for $25,000.

What is your capital gains tax? Which BTC is used to calculate the capital gains tax? Year 1, 2, 3, 4, 5?

There are several accounting methodologies to account for the "inventory", typically FIFO, LIFO or even average cost. the laws in your country will allow you to use either one or more of these. It is very common that they consider that you have sold the one you bought the cheapest, so that the benefit is the maximum and you pay more taxes sooner than later. So, this is something specific to your jurisdiction I am afraid, nothing that can be generalised.

[avikz]

The accounting methodology to calculate capital gains tax is different for different countries. While many of the countries use first in first out method as mentioned already, some countries also use average purchase price to calculate capital gains tax.

So I would suggest to speak to a local tax analyst or lawyer to find out the correct method for your country. For my country it is FIFO.

[apogio]

Bitcoin works differently than Ethereum.

In Bitcoin there are UTXOs. You can imagine them as dollar bills.

So, if in year 1 you buy 1 BTC and send it to your wallet, there will be 1 UTXO of 1 BTC in your wallet.

If in year 2 you buy 1 BTC and send it to your wallet, there will be 1 more UTXO of 1 BTC in your wallet.

...
...
...

If in year N you buy 1 BTC and send it to your wallet, there will be 1 more UTXO of 1 BTC in your wallet.

So, if in year N+1 you decide to sell, you can decide which UTXO you want to sell. You can also sell a fraction of the UTXO, or combine multiple UTXOs and sell them.

I don't know how it works with accounting but that's how it works with Bitcoin. If you know your UTXOs and also know the prices at which you bought them, you basically know which BTC you sell at every time, provided that you have a self custody wallet with coin-control ability. If you keep your Bitcoin in exchanges, then it's a whole other story and you should WITHDRAW YOUR BITCOIN FROM EXCHANGES  

[DaveF]

The accounting methodology to calculate capital gains tax is different for different countries. While many of the countries use first in first out method as mentioned already, some countries also use average purchase price to calculate capital gains tax.

So I would suggest to speak to a local tax analyst or lawyer to find out the correct method for your country. For my country it is FIFO.

Beyond that you may be able to write off some gains (if any) against other losses.
If you are talking about the numbers you posts as real then yes consult a local tax advisor that understands crypto.

There are a lot of different options and variables and getting advice from an internet forum about this is shaky at best.

If the amounts you posted are not real (i.e. you did not get 1 BTC for $20000 but only got 1/10 BTC for $2000) then the risk of being wrong and paying a little more in taxes is not as bad as if you bought 10BTC instead of 1BTC.

-Dave

[OgNasty]

As has been already stated, I don’t use any concrete method as scenarios change. If I have a ton of losses on my portfolio, I might use that as a chance to balance out my older BTC gains. If I don’t have any losses to offset gains then I will most likely use the last in first out method to keep taxes reduced. It’s nice to have options when tax time comes.

[pixie85]

It'd going to depend on your country, but in my case (EU) you pay tax when you sell your coins and the profit is what you subtract your tax from.
For example

You bought 2 bitcoin for 25000 each
and you sold 1 for 30000 the next year and another for 40000 a year later. In the first year you only declare the gain from your first bitcoin, so 5000 in profit and that's your taxable income. The next year you report the sale of your second bitcoin and declare 15000 in profit and pay tax from that amount.

In most countries you don't have to pay any tax if you don't sell your bitcoin and don't profit from it. Both of these things have to occur for a taxable event to appear.

[tbct_mt2]

[Tutorial] Crypto taxes for beginners

Your cost basis price will be an average of your coins and you don't have to pick which coin is for your entry and exit for your tax report. I understand it like this and hope I am not wrong. Because picking old or new coin for taking profit does not make sense at all.

The bottom line is you must have documents, account reports from exchanges to use those documents as part of your personal tax report. You can not say about your cost basis, your taking profit basis without any proof.

[NotATether]

I don't think the average price of UTXO coins is going to be acepted for tax purposes. They usually use the invoices and documents from the exchanges to verify at what price the Bitcoin was bought and sold. So if you bought BTC @ $30000 last year, and more BTC @ $25000 a few months ago, and the price goes up to $27000 or something, then they just look at the dollar value of the coins you bought at those particular times.

And they also look at the dollar value of the coins you're selling, and if it's greater than the amount you bought, that's when capital gains tax kicks in.

[apogio]

I don't think the average price of UTXO coins is going to be acepted for tax purposes. They usually use the invoices and documents from the exchanges to verify at what price the Bitcoin was bought and sold. So if you bought BTC @ $30000 last year, and more BTC @ $25000 a few months ago, and the price goes up to $27000 or something, then they just look at the dollar value of the coins you bought at those particular times.

And they also look at the dollar value of the coins you're selling, and if it's greater than the amount you bought, that's when capital gains tax kicks in.

But what if you don't use exchanges? I mean, personally I have stopped using exchanges, but I keep buying Bitcoin P2P. Let's assume that I wanted to declare capital gains, how else would I do it? There is no way 

[stompix]

Edit: I found this link which is helpful. Still not sure how to actually implement it.
https://www.accointing.com/en-US/blog/crypto-cost-basis

Use a quote if you're going to copy-paste and entire article, you're going to get in trouble this way.

I don't know how it works with accounting but that's how it works with Bitcoin. If you know your UTXOs and also know the prices at which you bought them, you basically know which BTC you sell at every time, provided that you have a self custody wallet with coin-control ability. If you keep your Bitcoin in exchanges, then it's a whole other story and you should WITHDRAW YOUR BITCOIN FROM EXCHANGES  

Accounting and IRS don't care about inputs or outputs or technical stuff.

It all depends on the taxation that your country uses or, in some cases it has multiple what they let you use.Without OP telling us from where he is this is a shot in the dark
If he is in the US he can use FIFO, first in first out, so if he has bought 10 batches of 10 BTC and decides to sell 5 he will pay tax on the profits compared to the first batch. If he sells 15 he will pay taxes on the first batch profits and on half of the second batch profits. In the UK the last time I checked they allowed Share Pooling so it means the median value of the bought coins versus the selling value.

So, it's all about the country's tax system.

But what if you don't use exchanges? I mean, personally I have stopped using exchanges, but I keep buying Bitcoin P2P. Let's assume that I wanted to declare capital gains, how else would I do it? There is no way 

Four hours spent each day for one week at the IRS and you'll come up with a solution. 
Remember, it's your problem, not theirs, from their point of view if you can't prove you have paid anything for them then they will claim it's zero so you're going to pay tax on profits for the entire selling value.