US Tax Formulas

Overview

This technical guide documents the mathematical formulas and calculation processes used by PrivateACB for US lot-based tax calculations. This is a companion document to the US Tax Calculation User Guide.

Audience: Users who want to understand the mathematics behind lot-based calculations, verify results manually, or understand how PrivateACB implements IRS rules.

Scope: Formulas, equations, and calculation processes. For step-by-step usage instructions, see the user guide.

IRS Methodology

Available Methods:

FIFO (First In, First Out)
LIFO (Last In, First Out)
HIFO (Highest In, First Out) Tax Authority: Internal Revenue Service (IRS) Regulatory Framework: IRS Publication 550, Form 8949, Schedule D

Key Principle: Each acquisition creates a separate “tax lot” that is tracked individually. When you sell, specific lots are consumed based on your chosen method.

Tax Lot Structure

Each acquisition creates a tax lot with:

Lot ID: Unique identifier
Asset Symbol: BTC, ETH, etc.
Acquisition Date: When purchased
Acquisition Price: Price per unit ($/unit)
Original Quantity: How many units purchased
Remaining Quantity: How many units still held
Total Cost: (Quantity × Price) + Fees
Cost per Unit: Total Cost ÷ Quantity
Lot Method: FIFO, LIFO, or HIFO

Example:

Lot #1:
  Date: 2024-01-01
  Asset: BTC
  Quantity: 1.0 BTC
  Price: $40,000/BTC
  Fees: $200
  Total Cost: (1.0 × 40,000) + 200 = $40,200
  Cost per Unit: $40,200 ÷ 1.0 = $40,200/BTC
  Method: FIFO

Core Formulas

1. Lot Creation (Acquisition)

When you buy cryptocurrency:

Total Cost = (Quantity × Price) + Fees
Cost per Unit = Total Cost ÷ Quantity

CREATE LOT:
  lot_id = unique_id()
  acquisition_date = transaction_timestamp
  original_quantity = acquired_quantity
  remaining_quantity = acquired_quantity
  cost_per_unit = total_cost ÷ quantity
  total_cost = calculated above

Example:

Buy 2.5 BTC @ $35,000/BTC, fees $300

Total Cost = (2.5 × 35,000) + 300 = $87,800
Cost per Unit = $87,800 ÷ 2.5 = $35,120/BTC

Lot Created:
  ID: lot-001
  Date: 2024-02-15
  Original Qty: 2.5 BTC
  Remaining Qty: 2.5 BTC
  Cost/Unit: $35,120/BTC
  Total Cost: $87,800

2. Lot Consumption (Disposal)

When you sell cryptocurrency, lots are consumed based on your method.

Step 1: Calculate proceeds

Proceeds = (Quantity Sold × Sale Price) - Fees

Step 2: Select lots to consume (see method-specific logic below)

Step 3: For each consumed lot:

Quantity Consumed from Lot = MIN(Lot Remaining Quantity, Quantity Still Needed)
Cost Basis from Lot = Quantity Consumed × Lot Cost per Unit

Step 4: Calculate capital gain

Total Cost Basis Consumed = SUM(Cost Basis from each consumed lot)
Capital Gain = Proceeds - Total Cost Basis Consumed

Step 5: Update lots

FOR each consumed lot:
  New Remaining Quantity = Old Remaining Quantity - Quantity Consumed
  IF New Remaining Quantity = 0 THEN
    Mark lot as fully consumed
  END IF
END FOR

Method-Specific Lot Selection

FIFO (First In, First Out)

Rule: Consume the oldest lots first.

Sort Order:

Sort active lots by acquisition_date ASC
  (earliest date first)

Example:

Active Lots:
  Lot A: 2024-01-01, 1.0 BTC @ $40,000/BTC
  Lot B: 2024-02-01, 1.5 BTC @ $45,000/BTC
  Lot C: 2024-03-01, 2.0 BTC @ $50,000/BTC

Sell 2.0 BTC:
  1. Consume Lot A entirely (1.0 BTC @ $40,000/BTC) = $40,000 cost basis
  2. Consume 1.0 BTC from Lot B (1.0 BTC @ $45,000/BTC) = $45,000 cost basis
  Total Cost Basis = $40,000 + $45,000 = $85,000

Remaining Lots:
  Lot B: 0.5 BTC @ $45,000/BTC
  Lot C: 2.0 BTC @ $50,000/BTC

LIFO (Last In, First Out)

Rule: Consume the newest lots first.

Sort Order:

Sort active lots by acquisition_date DESC
  (most recent date first)

Example:

Active Lots:
  Lot A: 2024-01-01, 1.0 BTC @ $40,000/BTC
  Lot B: 2024-02-01, 1.5 BTC @ $45,000/BTC
  Lot C: 2024-03-01, 2.0 BTC @ $50,000/BTC

Sell 2.0 BTC:
  1. Consume 2.0 BTC from Lot C (2.0 BTC @ $50,000/BTC) = $100,000 cost basis
  Total Cost Basis = $100,000

Remaining Lots:
  Lot A: 1.0 BTC @ $40,000/BTC
  Lot B: 1.5 BTC @ $45,000/BTC
  Lot C: 0 BTC (fully consumed)

HIFO (Highest In, First Out)

Rule: Consume the lots with highest cost per unit first.

Sort Order:

Sort active lots by cost_per_unit DESC
  (highest cost first)

Example:

Active Lots:
  Lot A: 2024-01-01, 1.0 BTC @ $40,000/BTC (cost per unit)
  Lot B: 2024-02-01, 1.5 BTC @ $45,000/BTC
  Lot C: 2024-03-01, 2.0 BTC @ $50,000/BTC

Sell 2.0 BTC:
  1. Consume 2.0 BTC from Lot C (2.0 BTC @ $50,000/BTC) = $100,000 cost basis
  Total Cost Basis = $100,000

Remaining Lots:
  Lot A: 1.0 BTC @ $40,000/BTC
  Lot B: 1.5 BTC @ $45,000/BTC
  Lot C: 0 BTC (fully consumed)

Note: HIFO and LIFO often select the same lots if prices are trending upward, but differ when prices fluctuate.

Capital Gain Calculation

Short-Term vs Long-Term

Holding Period Formula:

Holding Period (days) = Disposal Date - Acquisition Date

Classification:

IF Holding Period > 365 days THEN
  Classification = "Long-term"
ELSE
  Classification = "Short-term"
END IF

Important: Each lot’s holding period is calculated independently. A single sale can result in both short-term and long-term gains if consuming multiple lots.

Example:

Sell 2.5 BTC on 2025-01-15:
  Consume Lot A (acquired 2024-01-01): Holding = 379 days → Long-term
  Consume Lot B (acquired 2024-11-01): Holding = 75 days → Short-term

Capital Gain from Lot A → Long-term gain
Capital Gain from Lot B → Short-term gain

Full Capital Gain Formula

For each disposal:

Proceeds = (Quantity × Sale Price) - Fees
Cost Basis = SUM(Quantity Consumed from Lot × Lot Cost per Unit)
Capital Gain = Proceeds - Cost Basis

Categorize by holding period:

FOR each lot consumed:
  IF lot holding period > 365 days THEN
    Long-term Gain += (Quantity from lot × (Sale Price - Lot Cost per Unit))
  ELSE
    Short-term Gain += (Quantity from lot × (Sale Price - Lot Cost per Unit))
  END IF
END FOR

Tax Implications:

Short-term gains: Taxed as ordinary income (10%-37% depending on tax bracket)
Long-term gains: Taxed at preferential rates (0%, 15%, or 20%)

Wash Sale Rule (Optional - Default: DISABLED)

⚠️ IMPORTANT: Wash sale rule is DISABLED by default in PrivateACB due to regulatory uncertainty (IRS has not definitively ruled on whether cryptocurrency qualifies as a “security” under IRC §1091).

Users can enable via the Wash Sale toggle in the Config Bar (Zone A) of the ACB Calculator.

Wash Sale Detection (If Enabled)

IRS Rule: If you sell securities at a loss and purchase substantially identical securities within 30 days before or after the sale, the loss is disallowed.

Detection Window:

Window Start = Sale Date - 30 days
Window End = Sale Date + 30 days
Total Window = 61 days

Rule Applies:

Wash Sale Detected = (Capital Gain < 0)
                   AND (Repurchase of same asset within 61-day window)

Important: Unlike Canadian superficial loss rule, the US wash sale window includes 30 days BEFORE the sale.

Wash Sale Calculation (If Enabled)

Step 1: Detect loss transaction

IF Capital Gain < 0 THEN
  Original Loss = |Capital Gain|
END IF

Step 2: Find replacement purchases

Search all transactions for:
  - Same asset symbol
  - Acquisition type (buy, reward, mining, staking, airdrop)
  - Within window: [Sale Date - 30 days, Sale Date + 30 days]

Step 3: Deny loss (100%)

IF replacement purchases found THEN
  Denied Loss = Original Loss
  Adjusted Capital Gain = $0  (loss is fully denied)
ELSE
  Adjusted Capital Gain = Original Loss  (no wash sale, loss allowed)
END IF

Note: Unlike Canadian rule, US wash sales deny 100% of the loss (no proration based on quantity).

Cost Basis Adjustment (If Wash Sale Detected)

The denied loss is added to the cost basis of the replacement lot.

Replacement Lot Selection:

Replacement Lot = First acquisition within the 61-day window
  (chronologically first)

Basis Adjustment:

New Cost per Unit = Old Cost per Unit + (Denied Loss ÷ Lot Quantity)
New Total Cost = Old Total Cost + Denied Loss

Example:

Jan 15: Sell 1 BTC @ $40,000 (cost basis $50,000) → $10,000 loss
Jan 25: Buy 1 BTC @ $38,000 (within 30 days after sale)

WASH SALE DETECTED:
  Original Loss = $10,000
  Denied Loss = $10,000
  Adjusted Capital Gain = $0 (cannot claim loss)

REPLACEMENT LOT ADJUSTMENT:
  Jan 25 Lot:
    Original Cost: $38,000
    Adjustment: +$10,000
    New Cost Basis: $48,000

When you sell the Jan 25 lot later:
  Cost Basis = $48,000 (includes the deferred $10,000 loss)

Wash Sale Example (If Enabled)

Full scenario:

Initial State: 0 BTC

Transaction 1 (Jan 1): Buy 1 BTC @ $50,000
  Lot A created: 1 BTC @ $50,000/BTC

Transaction 2 (Jan 15): Sell 1 BTC @ $40,000
  Consume Lot A: 1 BTC @ $50,000/BTC
  Proceeds = $40,000
  Cost Basis = $50,000
  Capital Gain = -$10,000 (loss)

  CHECK WASH SALE:
    Window = [Dec 16, Feb 14]
    Search for repurchases...
    Found: Transaction 3 (Jan 25)

  WASH SALE APPLIES:
    Denied Loss = $10,000
    Adjusted Capital Gain = $0
    Report on Form 8949: $0 (loss denied)

Transaction 3 (Jan 25): Buy 1 BTC @ $38,000
  Lot B created: 1 BTC @ $38,000/BTC
  Wash Sale Adjustment: +$10,000
  Adjusted Cost Basis: $48,000/BTC

Transaction 4 (Mar 1): Sell 1 BTC @ $45,000
  Consume Lot B: 1 BTC @ $48,000/BTC (adjusted)
  Proceeds = $45,000
  Cost Basis = $48,000
  Capital Gain = -$3,000

  This $3,000 loss includes the deferred $10,000 from Jan 15:
    Without wash sale: Jan 15 loss = -$10,000, Mar 1 gain = +$7,000
    With wash sale: Jan 15 loss = $0, Mar 1 loss = -$3,000
    Net result: -$3,000 (same total, just timing deferred)

Report Value Calculations

Form 8949 (Sales and Dispositions of Capital Assets)

For each disposal transaction:

Part I (Short-term):

Description: "X.XXX BTC"
Date Acquired: Lot acquisition date(s)
Date Sold: Disposal date
Proceeds: (Quantity × Sale Price) - Fees
Cost Basis: SUM(Lot Cost Basis)
Code: W (if wash sale applied), blank otherwise
Adjustment: Denied loss amount (if wash sale)
Gain/Loss: Proceeds - Cost Basis + Adjustment

Part II (Long-term): Same format, but for lots held > 1 year.

If multiple lots consumed:

Can be reported as single line: “Various” for acquisition date
Or separate lines for each lot (more detailed)

Schedule D (Capital Gains and Losses)

Summary totals from Form 8949:

Short-term:

Total Short-term Proceeds = SUM(all short-term sales)
Total Short-term Cost Basis = SUM(all short-term cost basis)
Net Short-term Gain/Loss = Proceeds - Cost Basis

Long-term:

Total Long-term Proceeds = SUM(all long-term sales)
Total Long-term Cost Basis = SUM(all long-term cost basis)
Net Long-term Gain/Loss = Proceeds - Cost Basis

Overall:

Net Capital Gain/Loss = Short-term + Long-term

Tax Calculation:

Short-term gains: Added to ordinary income
Long-term gains:
  - 0% rate if taxable income < threshold
  - 15% rate if taxable income in middle brackets
  - 20% rate if taxable income > high threshold

Weighted Average Age

PrivateACB calculates a weighted average holding period:

FOR each active lot:
  Lot Age (days) = Current Date - Acquisition Date
  Lot Weight = Lot Quantity ÷ Total Quantity

Weighted Average Age = SUM(Lot Age × Lot Weight)

Example:

Active Lots:
  Lot A: 1.0 BTC, 500 days old
  Lot B: 0.5 BTC, 200 days old
  Lot C: 2.0 BTC, 100 days old
  Total: 3.5 BTC

Weights:
  Lot A: 1.0 ÷ 3.5 = 0.286
  Lot B: 0.5 ÷ 3.5 = 0.143
  Lot C: 2.0 ÷ 3.5 = 0.571

Weighted Average Age:
  = (500 × 0.286) + (200 × 0.143) + (100 × 0.571)
  = 143 + 28.6 + 57.1
  = 228.7 days

Method Efficiency

PrivateACB calculates how well your chosen method minimized taxes:

Theoretical Worst-Case Gain = IF used method that maximizes gains
Actual Gain = Realized gains using chosen method

Method Efficiency = (Worst-Case - Actual) ÷ Worst-Case × 100%

Interpretation:

80-100%: Excellent tax optimization
60-79%: Good reduction in taxes
40-59%: Fair benefit
<40%: Minimal benefit from method choice

Processing Order

Critical: Transactions must be processed in strict chronological order.

Sort all transactions by timestamp (ascending)
For each transaction (in order):
- If acquisition: Create new lot
- If disposal:
  - Select lots based on method (FIFO/LIFO/HIFO)
  - Consume lots in selection order
  - Calculate capital gain
  - Check wash sale rule (if enabled)
  - Apply adjustments if wash sale detected
  - Update lot quantities
Calculate short-term vs long-term categorization
Generate Form 8949 records
Calculate Schedule D totals

Currency Conversion

When transactions are in CAD (or other non-USD currencies):

Converted Amount:

USD Amount = CAD Amount ÷ Exchange Rate for transaction date

Example:

Buy 1 BTC @ $13,500 CAD on Jan 1, 2024
Exchange Rate (CAD/USD) on Jan 1, 2024 = 0.7407  (or USD/CAD = 1.3500)

Total Cost in USD = $13,500 CAD × 0.7407 = $10,000 USD

All lot calculations use USD amounts. The cost per unit and capital gains are all in USD.

Edge Cases

Partial Lot Consumption

When a sale consumes part of a lot:

Lot: 2.0 BTC @ $40,000/BTC
Sell: 0.5 BTC

Consumed: 0.5 BTC
Cost Basis: 0.5 × $40,000 = $20,000
Remaining in Lot: 2.0 - 0.5 = 1.5 BTC
Lot still active with 1.5 BTC @ $40,000/BTC

Multiple Lots Consumed

A single sale may consume multiple lots:

Lot A: 1.0 BTC @ $40,000/BTC
Lot B: 1.5 BTC @ $45,000/BTC
Sell: 2.0 BTC (FIFO)

Consume Lot A entirely: 1.0 × $40,000 = $40,000
Consume 1.0 from Lot B: 1.0 × $45,000 = $45,000
Total Cost Basis: $85,000

Lot A: Fully consumed (deleted)
Lot B: 0.5 BTC remaining

Zero Lots Remaining

When all lots are fully consumed:

No active lots
Total Quantity = 0
Total Cost Basis = 0
Next acquisition creates first lot again

Wash Sale Chains (If Enabled)

Wash sales can trigger repeatedly:

Jan 1: Buy 1 BTC @ $50,000 (Lot A)
Jan 15: Sell 1 BTC @ $40,000 → $10,000 loss
Jan 20: Buy 1 BTC @ $38,000 (Lot B) → Wash sale, loss denied
Feb 1: Sell 1 BTC @ $35,000 → Lot B cost = $48,000 → $13,000 loss
Feb 5: Buy 1 BTC @ $34,000 (Lot C) → Another wash sale

First wash sale: $10,000 denied, added to Lot B
Second wash sale: $13,000 denied, added to Lot C
Lot C cost basis = $34,000 + $13,000 = $47,000

Eventually, when you sell without repurchasing:
  All deferred losses are realized

Database Storage

PrivateACB stores calculation results in structured database tables:

tax_lots table:

One record per lot
Stores: acquisition_date, original_quantity, remaining_quantity, cost_per_unit, total_cost
remaining_quantity decreases as lot is consumed
Deleted when remaining_quantity reaches 0

capital_gains table:

One record per disposal
Stores: proceeds, cost_basis, capital_gain, holding_period, short_long_term
If wash_sale_applied = 1, capital_gain is adjusted (often $0)

wash_sales table (if wash sales enabled):

One record per detected wash sale
Stores: loss_amount, adjustment_amount, replacement_lot_id
Links to original disposal and replacement lot

Verification Process

To manually verify a lot-based calculation:

Obtain transaction list (sorted chronologically)
For each acquisition:
- Create lot with total cost = (qty × price) + fees
For each disposal:
- Select lots based on method (FIFO/LIFO/HIFO)
- Calculate cost basis = SUM(consumed lot costs)
- Calculate proceeds = (qty × price) - fees
- Capital gain = proceeds - cost basis
- Check wash sale if enabled and loss
Compare results to PrivateACB output:
- Number of active lots should match
- Total cost basis should match
- Capital gains should match (per transaction)
- Short-term vs long-term split should match

If discrepancy found:

Verify correct method (FIFO/LIFO/HIFO) was used
Check lot selection order (oldest for FIFO, newest for LIFO, highest cost for HIFO)
Verify fees are included in acquisition costs
Verify fees are subtracted from proceeds
Check wash sale detection (if enabled)

Regulatory References

IRS Publications:

Cryptocurrency Guidance:

Note: IRS has not definitively ruled on whether wash sale rules apply to cryptocurrency (treated as property, not securities). PrivateACB implements the rule as optional (default: disabled) for users who wish to apply it conservatively.

Summary

Key Formulas:

Lot Creation:

Total Cost = (Quantity × Price) + Fees
Cost per Unit = Total Cost ÷ Quantity

Lot Selection:

FIFO: Sort by date ASC (oldest first)
LIFO: Sort by date DESC (newest first)
HIFO: Sort by cost_per_unit DESC (highest cost first)

Capital Gain:

Cost Basis = SUM(Consumed Lot Quantity × Lot Cost per Unit)
Capital Gain = Proceeds - Cost Basis

Wash Sale (If Enabled):

IF loss AND repurchase within 61 days THEN
  Denied Loss = |Loss|
  Adjusted Gain = $0
  Replacement Lot Cost += Denied Loss
END IF

Holding Period:

IF (Disposal Date - Acquisition Date) > 365 days THEN
  Long-term gain (taxed at 0%-20%)
ELSE
  Short-term gain (taxed as ordinary income)
END IF

For procedural instructions, see: US Tax Calculation User Guide

Last Updated: February 2026 PrivateACB Version: 2.0 Regulatory Authority: Internal Revenue Service (IRS)