LiFo or FiFo
What's the difference?
In the context of crypto taxation, investors often come across the terms LiFo (last-in-first-out) and FiFo (first-in-first-out). These terms refer to different methods of valuing cryptocurrencies when they are sold. The methods chosen can have a significant impact on the tax burden.
LiFo (last-in-first-out) means that the cryptocurrencies purchased last are sold first. This can be advantageous in times of rising prices, as the newly purchased (more expensive) units are settled first.
FiFo (first-in-first-out), on the other hand, describes the method in which the cryptocurrencies bought first are sold first. This method can lead to higher tax payments if the purchase prices have risen.
Tax effects
With LiFo, investors can benefit from a lower tax burden in a bullish market as the newer, often more expensive units are sold.
In comparison, FiFo can lead to older, cheaper units being sold, resulting in higher profits and consequently a higher tax burden in a market with rising prices.
Traceability
FiFo offers clearer traceability, as the units purchased first are sold first. This can simplify accounting and increase clarity.
LiFo requires accurate records to be kept of the purchase prices and dates of the most recently acquired units. This can be practical, but also complex to administer.
Assume that an investor has carried out three transactions:
If the investor now sells 1 BTC and applies the FiFo method, the profit is calculated based on the EUR 10,000 from transaction A. This means that if the selling price is EUR 30,000, the profit will be EUR 20,000. However, if the investor uses the LiFo method, this is not recognized and the profit would still be calculated on the basis of the FiFo method. The profit is therefore calculated on the basis of the first transaction (EUR 10,000).
The German tax authorities have clarified that only the FiFo method is permitted for calculating profits from the sale of cryptocurrencies. This means that investors must sell the cryptocurrencies they purchased first. Investors should apply this method consistently and document their transactions carefully in order to comply with any audits by the tax authorities.
The decision between LiFo and FiFo has significant consequences for the tax treatment of cryptocurrencies. As only the FiFo method is recognized by the German tax authorities, investors should use this method to avoid legal problems and additional tax burdens. It is advisable to study the FiFo method in detail and seek legal advice if necessary. Our specialized crypto law lawyers can help you develop the best strategies for your individual situation.
This information serves as a general guideline and cannot replace individual tax advice from our experts. The tax treatment may vary depending on your specific situation and the current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and comply with the legal requirements.