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BY DEFAULT, the IRS, brokerage corporations, and most commerce accounting applications use the First-In-First-Out (FIFO) accounting methodology. For those who promote safety A, its cost-basis is the primary lot bought — the primary one “out” or bought.
However there may be another choice known as the Particular Identification (SI) accounting methodology. Assume you got a number of numerous safety A over the 12 months whereas the inventory elevated in worth. You may choose to make use of SI accounting as a substitute of FIFO to specify a better cost-basis lot to cut back your short-term capital positive factors for 2021. This lets you maintain the older bought inventory for 12 months at a decrease cost-basis for a long-term capital achieve taxed at a decrease price (as much as 20% for 2021 and 2022).
The IRS requires contemporaneous motion for utilizing SI. You should specify the lot to promote earlier than executing the sale, and the dealer should affirm these directions in writing at that very same time. You can’t resolve to make use of SI after the sale’s settlement date, like when getting ready your tax returns. The IRS offers a bit leeway to appropriate communication errors with the dealer by permitting a settlement date somewhat than a commerce date.
FIFO can also be the default accounting methodology for cryptocurrencies. Whereas SI is allowed, it’s difficult to make use of. See Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (irs.gov)
Q40. How do I identify a specific unit of virtual currency?
“You might determine a selected unit of digital foreign money both by documenting the precise unit’s distinctive digital identifier resembling a personal key, public key, and tackle, or by information displaying the transaction data for all items of a selected digital foreign money, resembling Bitcoin, held in a single account, pockets, or tackle. This data should present (1) the date and time every unit was acquired, (2) your foundation and the truthful market worth of every unit on the time it was acquired, (3) the date and time every unit was bought, exchanged, or in any other case disposed of, and (4) the truthful market worth of every unit when bought, exchanged, or disposed of, and the amount of cash or the worth of property obtained for every unit.”