Knowledge Base FIFO vs LIFO vs WAC: The Essential Guide to Crypto Accounting Methods

When you trade or sell an asset, you need to determine your cost basis, the value of the assets at the time you acquired them. This cost basis defines whether you realize a capital gain or a capital loss.

Different accounting methods can lead to very different results, making it important to understand how each one works.

Below are the three most common cost basis methods in crypto accounting: FIFO, LIFO, and WAC.

FIFO assumes the first coins or tokens you purchased are the first ones you sell .

Imagine a grocery shelf where the oldest items move to the front and get bought first, that’s FIFO in a nutshell.

Why use FIFO?

• Simple and easy to apply
• Commonly used in traditional accounting
• Works well for long-term investors

Potential impact: In a rising market, FIFO may lead to higher gains. In a falling market, it may lead to lower gains or even losses.

LIFO assumes the most recently acquired crypto is sold first.

Think of it as grabbing items from the back of the shelf, the newest ones go first.

Why use LIFO?

• Can reduce taxable gains in a rising market
• Reflects selling your most recently acquired coins first

Potential impact: In an upward trend, LIFO often results in smaller gains. In a declining market, it may result in larger gains or fewer losses.

WAC calculates a single average cost for all units of an asset you hold.

Think of it as blending all your purchase prices to determine one average cost per coin.

Why use WAC?

• Simplifies accounting
• Reduces the impact of price volatility
• Helpful for high-volume traders

Potential impact: WAC smooths out price fluctuations but may not always produce the lowest gain.

Your choice of accounting method affects:

• Whether you realize a gain or loss
• The size of that gain or loss
• Your portfolio performance

In general:

Rising markets:

• LIFO typically reduces gains
• FIFO may increase gains

Falling markets:

• FIFO may reduce gains
• LIFO may increase gains

Stable or fluctuating markets: WAC offers a balanced approach.

Consider:

• Trading frequency
• Market conditions
• Simplicity vs tax efficiency
• Your investment strategy

No method is universally superior, it depends on your goals, your trading style and in some countries tax regulations may even require the use of a specific accounting method.