Fair Market Value (FMV) is a term that comes up in a variety of fields such as Divorce, Taxation, Bankruptcy, and Estate Planning because they all involve valuing assets which can be difficult to assess. The Fair Market Value is the estimate of what an asset or property would sell for on the open market. Let’s take a look at how FMV applies to cryptocurrency assets and best practices when calculating it.
If you are finding yourself in a position where you’re needing to calculate the FMV of cryptocurrency assets, it is likely related to either tax, divorce, child support, estate planning, bankruptcy, or professional investing (operating as a business e.g. day trading). But looking up the price of a cryptocurrency on Coinmarketcap (CMC) and multiplying that by the quantity owned isn’t always a fair way of determining FMV for a variety of reasons:
1. Indexers like coinmarketcap calculate the price of cryptocurrencies based off of a variety of exchanges and trade pairings. In many cases if your local currency can be directly traded for the cryptocurrency at all, it’s having very minimal influence on the (indexed) price listed on CMC.
2. Prices differ between different exchanges, between different pairings on the same exchange, and even between different indexers such as Livecoinwatch.
3. The price at which you buy or liquidate may be above or below the rate on the indexer you use. Furthermore, when you liquidate you may have done so for another cryptocurrency which again may be difficult to determine the FMV of.
4. The currency may not be on CMC or other indexers or those indexers may be including (or not including) certain exchanges that are skewing the price.
Let’s start by taking a cryptocurrency asset and trying to determine the fair market value in local currency. Bitcoin is an obvious choice but has an abundance of pairings to local currencies, so I’ve decided to go with Stellar’s XLM in the case below. For a local currency, rather than using USD, I’ve chosen Canadian Dollars (CAD). We can start by making the following observations:
1. The price according to CMC is 0.109658 USD at the time of article writing.
2. There are no XLM/CAD pairings available as per CMC
4. The price according to NDAX is 0.1485 CAD at the time of article writing.
Which Way is Correct?
There isn’t necessarily a single correct answer to this question. Furthermore, correct answer(s) can vary based on jurisdiction. If a Canadian purchases XLM with CAD on NDAX there’s a very clear value regarding how costly it was to acquire the XLM. But the cost of acquisition (or disposition) is not necessary the same as FMV.
Perhaps you’re neither buying or selling and for whatever reason need to calculate the value of your XLM holdings? Is the amount that the XLM would sell for on XLM a fair representative of the FMV? The answer is maybe. NDAX does have the highest XLM/CAD trading volume of all the major exchanges, but the volume is still relatively low compared to other exchanges offer XLM pairings (with BTC, ETH or USD). Other possible ways the price could be calculated include but is not limited to:
1. Using the applicable XLM price on an indexer, and multiplying by the USD/CAD mid-market price. This still begs the question of which indexer one should use though.
2. Use the XLM/BTC rate instead which has much higher trading volume. However, this method requires calculating the price of BTC, which again begs the question of whether the BTC price should be calculated using an indexer or a specific exchange. As we can see from CBix, the BTC/CAD price differs considerably between exchanges with the lowest bid price of 4770.10 on Kraken and 5140.00 on Quadriga.
What Not To Do
What can be said here is that you should not attempt to manipulate the numbers to your own advantage. For example, let’s say you happen to be going through a divorce and need to report the value of your XLM which you own but your spouse does not. Obviously it’s in your interest to make the value of your XLM seem as low as possible, so you might be tempted into calculating the value of your XLM via a variety of different methods and then picking whatever one shows the lowest value. This is the wrong way to do things – you’re not calculating fair market value.
There’s no one correct calculation method to choose. Just be fair, consistent, and reasonable in your approach. If you approach it with that perspective, should your calculation method ever be challenged, you’ll be in an ideal position to defend your approach as being the most fair.
Example 2: XLM/BTC Swing Trading
Let’s say you’ve been doing a high volume of trades on a specific pairing to take advantage of price swings and you need to determine your gain/loss for each day. You know how much profit/loss you earned each day in BTC. One prime example of not being fair and trying to manipulate earnings would be to calculate the price of BTC on days you were profitable (in BTC) using the lowest BTC/CAD rate you can find, while on days you suffered a loss (in BTC) using the highest BTC/CAD rate you can find.
The solution is to be both reasonable and consistent about how you calculate the price of BTC.
Given the lack of detailed guidance from government agencies, there is no ‘correct’ way to FMV for cryptocurrency assets. There are however some incorrect ways. Use of major indexers and/or local exchanges can be utilized in your calculations. Be fair and reasonable with regards to how you calculate prices, be consistent, and be prepared to defend your approach as fair if challenged.
Note: Nothing in this article is to be construed as legal, financial, or tax advice.