Background – What is CGT?
A lot of us live in jurisdictions where disposing of crypto by any means (gifting, exchanging for goods and services, bartering, etc.) is a taxable event where you pay capital gains tax on today’s price vs. when-you-bought-it price.
This becomes problematic if your tax authority makes you use FIFO. FIFO simply is First in, first out.
Example: You hold a stack of 10 ETH. That stack has been accumulated over years of HODLing, trading, etc. and has some when it was $300, some when it was $3,000 and everything in between.
Now in some countries the tax authority is staunch that you must use FIFO when calculating price of acquisition at the time of disposal, and this is where you can get fucked without even realising.
What is FIFO and are there alternatives?
FIFO is First in, First Out, i.e., if you buy a laptop from someone now for 1 ETH, you are disposing of the earliest acquired 1 ETH.
So if you bought your first 1 ETH when it was $100 you are literally fucked because if ETH is $2,300 today, you will pay capital gains on $2,200. Even if some of your ETH was bought at ATH! Depending on your CGT rate (or marginal income tax rate as in some countries CGT is purely
income), that could be a massive amount that exceeds whatever discount or benefit you achieved by buying in Crypto rather than fiat.
There are other methods that MAY apply in some cases/jurisdictions, such as LIFO, HIFO, ACB (which are respectively, “last in, first out”, “highest in, first out” and “average cost basis”). IMO, ACB makes more sense, but we all know tax works the way it works.
Now, under FIFO, even if you buy 1 ETH today and use it to buy the laptop (for whatever reason, say the merchant is giving you a crypto payment discount or whatever the reason is), if you do that, you are still disposing of your oldest ETH.
So what is the trick you can use?
Simple, if the merchant uses a currency you do NOT hold any balance of now, use that currency to pay them, i.e. buy enough of it to cover the goods/services you are buying as well as the transaction fee and send it.
This would still be a CGT-reportable event in some jurisdictions but would have a ZERO value because you disposed of it while it was of the same price (similar to when selling a stablecoin that is pegged to your tax-resident country’s fiat currency, there is no way you can make gains on selling USDC in the United States !)
Not naming names but I am sure most of us can find a coin or two they do not invest in for whatever reason and can use it for transactions like this!
Let’s say you only hold ETH and BTC
Now you want to buy something from a merchant that accepts ETH, BTC, LTC, DOGE, BCH.
They offer 10% if you pay with crypto for example.
If you use your ETH or BTC to pay, you pay capital gains.
But, if you buy LTC, BCH, DOGE with your fiat NOW (buy just enough to cover the purchase and transaction fees to send it), and use it to pay the merchant NOW while the price hasn’t changed, you are NOT incurring a capital gains tax expense.