TokenTax tax minimization algorithm is a type of specific-shares accounting. For every sale of crypto you have during the year, our algorithm will look at all available purchases and sell the one that minimizes taxes every time. It factors into account the difference in tax rates between your short-term and long-term gains (and every one has different marginal tax rates based on their income, state of residency and filing status).
Here's a quick explanation why our tax minimization algorithm reduces your 2017 taxes compared to FIFO (or LIFO, or any other method):
You buy 1 Bitcoin for $1,000 in January 2017. You buy another bitcoin for $10,000 in November 2017. Both are sitting in your account together and you decide to sell 1 Bitcoin in December 2017 for $15,000 (let's say to exchange for Ethereum).
FIFO accounting stands for 'First-in first-out' (in other words, the first one you bought is the first one you sell) So... if you use FIFO accounting your taxable gain is $15,000 - $1,000 = $14,000
Our algorithm would figure out which bitcoin is the best to sell from a tax perspective, and decide on the more expensive Bitcoin you bought in November. So with our tax minimization accounting method, your taxable gain is much lower: $15,000 - $10,000 = $5,000.
Since they're both short term gains, the tax rate is the same. So we would save this user $9,000 x their Marginal Tax Rate.
A user with a marginal tax rate of 30%, for example, would see a $2,700 reduction in their 2017 tax liability!
This is a simplified example and, typically, the more trades a user has the bigger the tax savings our tax minimization algorithm can provide. If you had four different purchases of bitcoin, for example, our algorithm would sell the most expensive one first, and then progress onto the next most expensive one, and so on.