LIFO or FIFO
What is the difference?
In the context of crypto taxation, investors frequently encounter the terms LIFO (Last-in-First-out) and FIFO (First-in-First-out). These terms refer to different methods for valuing cryptocurrencies upon sale. The chosen method can have a significant impact on the tax burden.
LIFO (Last-in-First-out) means that the most recently acquired cryptocurrencies are sold first. This can be advantageous during periods 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 where the cryptocurrencies purchased first are sold first. This method can lead to higher tax payments if purchase prices have increased.
Tax implications
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 the sale of older, cheaper units, 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 improve clarity.
With LIFO (Limited Introductory) accounting, accurate records of the purchase prices and dates of the most recently acquired units must be kept. This can be practical, but also complex to manage.
Suppose an investor has made three transactions:
If the investor sells 1 BTC and uses the FIFO method, the profit is calculated based on the €10,000 from transaction A. This means that with a selling price of €30,000, the profit would be €20,000. However, if the investor uses the LIFO method, it is not recognized, and the profit would still be calculated based on the FIFO method. The profit is therefore determined based on the first transaction (€10,000).
The German tax authorities have clarified that only the FIFO (First-In, First-Out) method is permissible for calculating profits from the sale of cryptocurrencies. This means that investors must sell the cryptocurrencies they acquired first. Investors should consistently apply this method and carefully document their transactions to comply with any potential tax audits.
The choice between LIFO and FIFO has significant consequences for the tax treatment of cryptocurrencies. Since only the FIFO method is recognized by the German tax authorities, investors should use this method to avoid legal issues and additional tax burdens. It is advisable to thoroughly familiarize yourself with the FIFO method and seek legal advice if necessary. Our specialized crypto law attorneys can help you develop the best strategies for your specific situation.
This information serves as general guidance and cannot replace individual tax advice from our experts. Tax treatment may vary depending on your specific situation and current tax regulations. It is strongly recommended that you contact our lawyers to clarify your personal tax situation and ensure compliance with legal requirements.