7723 / How does a taxpayer identify which bitcoin or other virtual currency are involved in a sale, exchange or other disposal of the virtual currency?

In many cases, taxpayers own multiple pieces, or units, of the same type of virtual currency that were acquired at different times and at different costs. When a taxpayer does not dispose of all units of the type of virtual currency, the 2019 FAQ on virtual currency transactions provides that taxpayers are entitled to choose which specific pieces of virtual currency will be deemed part of the transaction.

This election can be made either by (1) documenting the specific currency unit’s unique digital identifier such as a private key, public key, and address, or (2) by records showing the transaction information for all units of a specific virtual currency, such as bitcoin, held in a single account, wallet, or address.

The information provided must generally include:

(1)  the date and time each unit was acquired,

(2)  basis and the fair market value of each unit at the time it was acquired,

(3)  the date and time each unit was sold, exchanged, or otherwise disposed of, and

(4)  the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.

For taxpayers unable to specifically identify pieces of virtual currency involved in a transaction, a first-in, first-out (FIFO) accounting method must be used (see Q 7722).¹