Choosing an accounting method is a significant part of getting your Form 8949 ready for filing. On TaxBit, you can use one of three different accounting methods:
- Specific ID - HIFO by Exchange
- Specific ID - HIFO Universal
All three methods are accepted by the IRS when it comes to filing your tax forms. You can find more information on FIFO and Specific ID in this blog article HERE.
Below is an overview of each cost basis assignment method to help you make an informed decision about which method is best for your situation.
What you’ll find:
- What is FIFO?
- What is the difference between Specific ID - HIFO Universal and Specific ID - HIFO by Exchange?
- How can I change my accounting method?
What is FIFO?
FIFO has been the most commonly used accounting method and is often used for reporting taxes on stocks. Short for “first in, first out”, the FIFO accounting method assigns cost basis to your disposals according to the first asset you acquired.
What is the difference between Specific ID - HIFO Universal and Specific ID - HIFO by Exchange?
HIFO stands for “highest in, first out.” Simply put, this means the asset with the highest cost basis is disposed of first. While this concept applies to both HIFO Universal and HIFO by Exchange, the primary difference between the two methods is how asset cost basis pools are separated.
HIFO Universal will take the highest cost basis first, regardless of where the asset is located. HIFO by Exchange, however, will group assets according to the wallet or exchange on which they are located.
For example, you might have purchased 0.5 BTC on Coinbase for $15,000, and you then buy another 0.5 BTC on Coinbase for $20,000. You’ve also purchased another 0.5 BTC on BlockFi for $25,000. You later decide to sell 0.5 BTC.
If your accounting method is set to HIFO Universal, the cost basis for the sale of 0.5 BTC will come from the asset with the highest cost basis; in this case, it would be the BTC from BlockFi regardless of where the sale took place.
If you’re using HIFO by Exchange, and the sale in this example took place on Coinbase, the second BTC purchased for $20,000 would be the sale’s cost basis, even though you have BTC on BlockFi with a higher cost basis.
How can I change my accounting method?
To change your accounting method, go to the My Taxes page in your TaxBit account. At the lower half of the page, you'll see a box labeled "Cost Basis Method." New TaxBit accounts will default to the Specific ID - HIFO by Exchange.
Click Edit, then click the dropdown arrow to see a list of all available accounting methods.
You’re welcome to change between the three available methods as much as you'd like before downloading your Form 8949. It's important to maintain consistency from year to year, so we don’t recommend changing your accounting method each tax season; this could potentially trigger a tax audit.
Still have questions? Send us an email at firstname.lastname@example.org, or chat with us using our live chat feature, and we'd be happy to help!