How to break the FIFO with co-ownership portfolios?
Before getting into flour, let us remind you that the FIFO (acronym in English for first-in, first-out) is the method used by the Treasury to calculate the impact of the change in equity of a fungible asset after its transfer or sale. And for this, it takes as a reference the oldest asset and its price, regardless of any other factor such as the means of acquisition or its location. It values the inventories sold at the price of the oldest units.
In a practical way, and as an example, we can consider the case of a person who acquired 300 bitcoins in 2015 in three exchange markets or Exchanges different at a rate of 100 in each. The Treasury makes no distinction and considers that the 300 assets share the same global basket, from which they will come out (regardless of whether it operates in one or another market or Exchange) in successive years.
Any output will be linked to the time of its entry and the price set at that time: these are the only labels that each digital asset has to calculate the increase (capital gain) or decrease (loss) in equity in the various transmissions.
In other words, the crypto assets intended for long-term investment will be consumed in short-term movements because in the eyes of the Treasury they are the same, and it does not distinguish the market or Exchange in which they are.
See previous article: https://cryptoplaza.es/hacienda-fifo-cryptomonedas-vikay/
Now, there are alternatives to prevent the FIFO from consuming the oldest cryptocurrency and thus be able to hold without affecting us: such as a community of property or a patrimonial civil society.
The contribution that occurs in these associations between natural persons allows the creation of two portfolios that go through different FIFO’s, that is, the FIFO is broken in order to remain ‘hodleed’. One FIFO is individual and the other is co-owned (articulated through the figures of the community of property or civil society). Both can be used to ‘hodle’ (by positioning crypto assets to accumulate unrealized latent value), or ‘trade’, if preferred (negotiate in the short term), without consuming FIFO.
But let’s return to the field of assumptions to visualize this approach from practice:
- Two people get married under the community property regime, which is why a “community of community property” is constituted. A spouse had inherited shares in a company and cryptocurrencies. The ownership of these last assets will continue to be individual after the marriage (although the fruits or yields are marital) but the new investments will be marital and the FIFO’s of both (private and marital) will walk separately to have different baskets.
- The other assumption arises in the scenario of a civil society. Two people also contribute shares in a company and crypto assets. Both at 50%. Subsequently, each one carries out different movements based on their objectives or interests, but individually, so that they will pay taxes and their capital changes will be calculated privately without affecting civil society, which can remain, for example, in hodl.
- A final example would be that of a conjugal partnership (property) that is undone without distribution, leaving the previous marital property and the next and following exclusive. For example, in the event that one of the two spouses carries out a transaction for the purchase and subsequent sale of cryptocurrencies after said separation of assets, the property prior to the separation would be jointly owned and the subsequent private, both with FIFOs that are also different.
The additional advantage of operating jointly is that the management of the assets and their accounting is carried out jointly, without managing two different portfolios, which simplifies accounting times and costs, as well as handling or management.
We hope we have clarified some things about your cryptocurrency operations. Do not miss our next article on the “Adverse tax effects on liquidity pools. Analysis and proposal of a fair and adequate accounting and fiscal alternative”.
By Pablo and Alejandro Rodriguez