Crypto Trading Portfolio Management and Tax Reporting 1 — Questions and Answers
Question 1: Which cost basis accounting method typically results in the lowest capital gains when crypto prices have risen over time?
- FIFO (First In, First Out)
- LIFO (Last In, First Out)
- HIFO (Highest In, First Out) (Correct answer)
- Specific Identification
Correct answer: HIFO (Highest In, First Out)
HIFO matches the highest-cost lots against sales first, minimizing the taxable gain on each sale when prices have appreciated.
Question 2: In the United States, the IRS classifies cryptocurrency as which type of property for tax purposes?
- Currency
- Commodity
- Property (Correct answer)
- Security
Correct answer: Property
The IRS treats cryptocurrency as property under Notice 2014-21, meaning capital gains rules apply rather than foreign currency rules.
Question 3: What is a 'wash sale' rule, and how does it currently apply to cryptocurrency in the US?
- It applies fully to crypto, disallowing losses if you rebuy within 30 days
- It does not currently apply to crypto, allowing you to harvest losses and immediately rebuy (Correct answer)
- It applies only to crypto held on regulated exchanges
- It applies to crypto only if the position exceeds $10,000
Correct answer: It does not currently apply to crypto, allowing you to harvest losses and immediately rebuy
As of current US tax law, the wash sale rule applies only to securities, so crypto traders can sell at a loss and immediately repurchase the same asset to realize the tax loss.
Question 4: Which IRS form is used to report capital gains and losses from cryptocurrency transactions?
- Form 1099-B
- Schedule D and Form 8949 (Correct answer)
- Form W-2
- Schedule C
Correct answer: Schedule D and Form 8949
Crypto capital gains and losses are reported on Form 8949 (with each transaction detailed) and then summarized on Schedule D of your tax return.
Question 5: What does portfolio 'rebalancing' mean in the context of crypto trading?
- Selling all holdings and converting to stablecoins
- Adjusting asset weights back to a target allocation by buying and selling (Correct answer)
- Moving assets from one exchange to another
- Averaging down on losing positions
Correct answer: Adjusting asset weights back to a target allocation by buying and selling
Rebalancing restores your portfolio to its target allocation percentages by selling assets that have grown above their target weight and buying those that have fallen below.
Question 6: A crypto trader receives tokens through a hard fork. According to IRS guidance, when is this income taxable?
- Only when the tokens are sold
- At the time the tokens are received and the taxpayer has dominion and control (Correct answer)
- Only if the tokens exceed $600 in value
- It is never taxable as it is considered a return of capital
Correct answer: At the time the tokens are received and the taxpayer has dominion and control
Per IRS Revenue Ruling 2019-24, hard fork tokens are taxable as ordinary income at their fair market value at the time the taxpayer receives and controls them.
Question 7: What is the primary advantage of using a crypto portfolio tracker like CoinTracker or Koinly?
- They automatically execute trades to maximize profit
- They aggregate transaction history across exchanges and wallets to calculate tax liability (Correct answer)
- They provide leverage for margin trading
- They guarantee the lowest tax bill legally possible
Correct answer: They aggregate transaction history across exchanges and wallets to calculate tax liability
Portfolio trackers import transaction data from multiple exchanges and wallets, calculate cost basis, and generate tax-ready reports like Form 8949 automatically.
Crypto Trading Portfolio Management and Tax Reporting 1
Which cost basis accounting method typically results in the lowest capital gains when crypto prices have risen over time?