How Does the Specific Identification Method Differ from FIFO for Crypto Taxes?
The Specific Identification method allows a trader to choose which specific lot of cryptocurrency, identified by its purchase date and cost, is being sold. This is a significant advantage over FIFO, as it enables tax optimization by allowing the trader to sell lots with a higher cost basis to minimize capital gains, or sell older lots to realize long-term gains.
It requires meticulous record-keeping to prove the specific lot sold.
Glossar
Specific Identification
Attribution ⎊ Specific Identification, within cryptocurrency derivatives and options trading, establishes a clear link between a particular asset and its corresponding contractual obligation, crucial for accurate risk management and settlement processes.
Specific Identification Method
Method ⎊ The Specific Identification Method, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, denotes a formalized process for uniquely identifying and tracking individual contracts or positions.
FIFO
Allocation ⎊ First-In, First-Out, within cryptocurrency, options, and derivatives, dictates the order of asset disposition for tax and accounting purposes, directly impacting realized gains or losses; this methodology assumes the earliest acquired units are the first ones sold, influencing the cost basis calculation and subsequent tax liabilities, particularly relevant in decentralized finance where tracking acquisition dates is crucial.