How I cut my crypto tax obligations in half by comparing accounting methods

Few people seem to care about this when they ask for crypto tax software recommendations, and it boggles my mind as to why:

How much money can this crypto tax software save me in taxes?

To me, that's question #1, for to many other people, it's not even on their radar. 🤦‍♂️

Anyway, that question boils down to, "What accounting method can that software use". You might have heard about FIFO vs. LIFO, but in 2019, the IRS issues guidance that can be applied retroactively, allowing you to use any accounting method you like, as long as you use it consistently (i.e. for all years you file).

I'm filing crypto taxes for 2017, 2018, and 2019, so I've compared a bunch of accounting methods against my real data - 14,000 transactions across various exchanges (Kraken and BitMEX generated the bulk of them) and several wallets (far fewer there). The tax brackets considered were 28% for short term gains, and 15% for long-term gains. Most of my trades were short term, but some accounting methods manages to mark more trades as long-term than others. I used Cointracking.info, because it has the most accounting methods, and because it was far cheaper than Cointracker.io. (Turned out Cointracking.info also generated better results than Cointracker, and did so far faster - ~10 seconds vs. hours).

To protect my privacy and for simplicity, I'll divide all amounts of tax I need to pay by the same constant factor, and round numbers to the nearest $10. Obviously, lower is better. For losses, lower is better too, but keep in mind you can only carry forward $3000 of capital loss to offset future years gains, so it's best to have lower gains, than larger losses. Otherwise if you have say a $18,000 loss, you'll need to wait 6 years until you can finish applying that loss.

Anyway, here we go:

• FIFO (First In First Out): 2017 $5540, 2018 -$3410 (loss), 2019 $750. Verdict: garbage
• LIFO (Last In First Out): 2017 $2300, 2018 -$2380, 2019 $170. Verdict: better
• HIFO (Highest Cost First Out): 2017 $3200, 2018 -$3210, 2019 $330. Verdict: worse than LIFO
• LOFO (Lowest Cost First Out): 2017 $4730, 2018 -$2620, 2019 $260. Verdict: bad
• HFPO (Highest Price First Out): 2017 $2250, 2018 -$2480, 2019 $120. Verdict: best
• LPFO (Lowest Price First Out): 2018 $5640, 2018 -$2040, 2019 $630. Verdict: garbage
• HAFO (Highest Amount First Out): 2017 $4600, 2018 -$2640, 2019 $410. Verdict: worse than HPFO
• LAFO (Lowest Amount First Out): 2017 $2490, 2018 -$1580, 2019 $270. Verdict: worse than HPFO
• OPTI (Optimized Calculation): 2017 $2660, 2018 -$1680, 2019 $19. Verdict: worse than HPFO

So there you have it, HPFO was the best accounting method for my trades, followed closely by LIFO. Compared to the default FIFO method, HPFO reduced my tax obligations in half. Your transactions may yield different results, but it really pays off to be able to try different accounting methods, so make sure you check what accounting methods your crypto tax software supports.