Crypto Trading Portfolio Management and Tax Reporting

Question 1

Which cost basis accounting method typically results in the lowest capital gains when crypto prices have risen over time?

Accepted Answer

HIFO (Highest In, First Out)

Answer

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?

Accepted Answer

Property

Answer

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?

Accepted Answer

It does not currently apply to crypto, allowing you to harvest losses and immediately rebuy

Answer

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?

Accepted Answer

Schedule D and Form 8949

Answer

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?

Accepted Answer

Adjusting asset weights back to a target allocation by buying and selling

Answer

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.

Crypto Trading Practice Test

Crypto Trading Practice Test

Crypto Trading Portfolio Management and Tax Reporting