The cost basis method you choose determines which specific coins are considered 'sold' when you make a disposal, significantly affecting your tax liability. Common methods: FIFO (First In, First Out), LIFO (Last In, First Out), HIFO (Highest In, First Out), Specific Identification, and Average Cost. The right choice depends on your jurisdiction's rules and your tax situation.
FIFO: sell the earliest-acquired coins first — default in most jurisdictions, LIFO: sell the most recently acquired coins first — often results in short-term gains, HIFO: sell the highest cost basis coins first — minimises gains, Specific Identification: choose exactly which lot to sell — maximum flexibility, Average Cost: total cost ÷ total coins — simplest but may not optimise tax, Section 104 pool (UK): a variation of average cost mandated by HMRC
Tax impact varies dramatically by method. Example: bought 1 BTC at $10K, 1 BTC at $50K. Sell 1 BTC at $30K. FIFO: $20K gain. LIFO: $20K loss. HIFO: $20K loss. Average: $5K gain.
Must use a consistent method within a tax year (usually). Document your chosen method before tax filing. Some jurisdictions mandate specific methods (UK: Section 104 pool). Consult guidelines for your jurisdiction.
Choose your cost basis method strategically — HIFO typically minimises your current tax bill. However, it shifts gains to the future (the remaining lots have lower basis). FIFO is the safest choice if you're unsure, as it's the default in most jurisdictions.
Disclaimer: This guide is for informational purposes only and does not constitute tax advice. Tax laws change frequently. Always consult a qualified tax professional for advice specific to your situation.