Tax Inventory Cost Identification

Index - https://steemit.com/tax/@alhofmeister/2666al-tax-blog-index

Discussion
The purpose of this posting is to discuss the cost identification methodologies available to taxpayers. The available methodologies are as follows:

1. First In First Out (FIFO) - Inventory is disposed of in the order that it was acquired. As an example, one widget was acquired at a cost of $100 and a second was acquired at a cost of $200. At a later date a single widget was sold at a price of $300. The cost associated with the sold widget would be $100.

2. Last In First Out (LIFO) - Inventory is disposed of in the reverse order that it was acquired. As an example, one widget was acquired at a cost of $100 and a second was acquired at a cost of $200. At a later date a single widget was sold at a price of $300. The cost associated with the sold widget would be $200.

3. Specific Identification - Inventory is disposed of is specifically identified. As an example, one widget was acquired at a cost of $100 and a second was acquired at a cost of $200. At a later date the $200 widget (identified by some distinct marker) was sold at a price of $300. The cost associated with the sold widget would be $200.

Generally, FIFO is the required methodology for cost identification. LIFO can be used under very specific circumstances and permission to use the methodology must be obtained by filing form 970 with the IRS.

Specific identification is only allowable when a taxpayer can distinguish the item being sold from the population. When talking about financial instruments in a homogeneous population (such as Bitcoin acquired in an investment account over time), specific identification will not be considered a reasonable valuation methodology.

References



https://www.irs.gov/pub/irs-pdf/p538.pdf https://www.irs.gov/pub/irs-pdf/f970.pdf https://www.law.cornell.edu/uscode/text/26/472 https://www.law.cornell.edu/uscode/text/26/474

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.