Holding Period Algorithms and the Blockchain

Question

According to this interview, taxation holding periods in the United States for cryptocurrency can be determined by FIFO (First In First Out), LIFO (Last In First Out), or a more flexible option called Versus Purchase or Specified Asset, which allows the owner to declare which specific coins they wish to be considered to have spent.

My question is, do these holding period algorithms have to correspond to the actual UTXOs being spent on the blockchain? Does using FIFO entail that you have to program your wallet to spend older UTXOs before newer ones, and vice-versa for LIFO? Does Specified Asset require the owner to actually keep track of which UTXOs their wallet is spending? These details are otherwise at a level of technical understanding far deeper than what a regular user would need to operate a wallet, and the UTXO choices wallets make are typically chaotic. Are these details essential to holding period algorithms, or can spent coins specified for tax purposes diverge from spent UTXOs in the blockchain history?

Answer 1

My question is, do these holding period algorithms have to correspond to the actual UTXOs being spent on the blockchain?

This is likely a question best answered by a qualified accountant, or tax lawyer.

I say this because there are many nuances to it: if you spend half of your oldest UTXO, to sell it for cash, then what do we say about the change output? It is a brand new UTXO, but clearly you bought those coins long ago. Similarly, how would the age or origin of a coin-consolidation UTXO be calculated? What about outputs from coinjoin-style transactions? What happens if I just want to update my cold storage system, and want to move coins to new addresses? etc.

I hope these examples help highlight the difficulty of applying existing regulations to a new system like Bitcoin. If you are looking for tax/legal advice, the best course of action is to ask a professional, not a stranger on the internet.

Does using FIFO entail that you have to program your wallet to spend older UTXOs before newer ones, and vice-versa for LIFO?

A wallet using such a system would be bad for your privacy, UTXO-management, and fee-management, plus it still wouldn't answer the questions I mentioned above. So I doubt that any reasonable regulation would require such a thing.