2017 Was the Perfect Storm for Crypto-Tax-Minimization Accounting

How accounting lowered a crypto-tax bill from $1.9m to $100k

Zac McClure
Apr 5, 2018 · 4 min read
Image for post
Image for post
A comparison of FIFO and TokenTax tax-minimization algorithm

Cryptocurrency investing in 2017 was the perfect storm for the tax minimization accounting method to be valuable for 4 main reasons:

1) All short-term gains: the vast majority of crypto investors had large short-term gains, and little to no long-term gains, so most transactions that used FIFO still won’t get long-term gain treatment

2) Alt-coins: to buy (most) Alt-coins users had to do a coin-to-coin exchange which is taxable, when the same purchase with US dollars wouldn’t have been taxable

3) Extreme price increases: Bitcoin, the most stable crypto, increased ~1900% just during 2017- so there is a huge difference between FIFO and LIFO taxes even, let alone tax minimization

4) Large price volatility: Cryptocurrency assets have much more volatility than traditional asset classes like stocks and bonds; which is why figuring out which Bitcoin to sell to minimize your taxes every time you sell one pays off a lot more with crypto than other asset classes lately

Tax-minimization accounting example

Here’s a simplified example of how tax minimization accounting method would work :
You bought 3 BTC:
1 in Jan 2017 for $1k
1 in June 2017 for $5k
1 in Aug 2017 for $3k

You sell 1 BTC in December for $10k

Your taxable gain is calculated as follows:
Proceeds- CostBasis=Gain

FIFO: $10k — $1k =$9k
LIFO: $10k — $3k =$7k
Tax min: $10k — $5k =$5k

To be more nuanced, all three of these methods are just specific types of what the IRS calls “specific-shares” accounting — but FIFO and LIFO are the most popular methods because they are the two simplest types of “specific shares” accounting to keep track of from a record keeping perspective

Typically, it doesn’t make that much difference if prices don’t change too much, which is why very few people, other than wealthy investors with a lot of stocks and bonds etc, ever cared what method was used. But with an asset as volatile as Bitcoin, let alone the altcoins, the reduction in taxes for an investor in a given year can be enormous

Why has FIFO been the default?

FIFO has long been the default because if you are a long-term buy-and-hold investor, who owns stocks or bonds that grow over time but don’t appreciate that much, the most important thing when selling an asset is that it gets long term capital gains treatment.

If you have an account where you buy some stocks and bonds every year, and reinvest the dividends every 3 months as you receive them, and eventually decide to sell some of your holdings — if you use LIFO you’ll sell the ones you bought most recently and probably have short term gains!

Short term gains are taxed at much higher rates than long term gains (2x or more usually). If you use FIFO, you’ll be sure to have long term gains — and thus lower taxes.
So FIFO has always been the default for most investors even though it’s just as easy as LIFO.

Specific shares wouldn’t matter much if the prices you bought a $1000 bond at were $850, $900, $950 etc- then the most important thing is usually to have long term gains.

TokenTax Minimization Algorithm

Do you prefer a larger long-term gain or smaller short-term gain?

The answer? It depends. TokenTax’s tax minimization algorithm is a type of specific-shares accounting. For every sale of crypto you have during 2017, our algorithm will look at all available purchases and select the one that minimizes taxes — every time.

It factors into account the difference in tax rates between your short-term and long-term gains because every one has different marginal tax rates based on their income, state of residency, and filing status.

With the same set of trades different people could have a different tax-minimization result.

A quick example to illustrate this:

Alex lives in California and his short-term capital gains are taxed at 35% and his long-term capital gains are taxes at 20%

He bought 2 BTC:
1 in June 2016 for $450
1 in Jan 2017 for $700
He sells 1 BTC in December 2017 for $1,000

Gains are calculated as follows:
Proceeds- CostBasis=Gain

Long-term gain: $1,000 — $450 =$550 → Taxes = $550 * 20% = $110
Short-term gain: $1,000 — $700=$300 → Taxes = $300 * 35% = $105

Alex prefers the short-term gain because his taxes are lower.

Now, if Diana, who lives in Texas and based on her income and filing status has a short-term gain tax rate of 30% and a long-term gain tax rate of 15% makes the exact same trades

Long-term gain: $1,000 — $450 =$550 → Taxes = $550 * 15% = $82.50
Short-term gain: $1,000 — $700=$300 → Taxes = $300 * 30% = $90

Diana actually prefers the long-term gain!

The TokenTax algorithm takes into account numerous variables — such as your filing state, filing status, estimated income to make our tax minimization calculations as precise as possible and reduce our user’s 2017 tax bills as much as possible.


96% of our customers have seen their tax bill reduced by more than they paid us for our cryptotax services, when comparing FIFO with minimization.

Come try out our tax minimization algorithm today! Please feel free to post any questions below or reach out to us directly on , , , or at !

And if you just can’t enough crypto-tax these days check out the latest podcast from The Bitcoin Game — hosted by Rob Mitchell


Everything about cryptocurrency tax

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store