# Lot-Based Accounting

CapSign uses **lot-based accounting** (ERC-7752) to track every token's acquisition date, cost basis, and origin - essential for tax reporting and regulatory compliance.

## What is a Lot?

A **lot** is a group of tokens with the same:

* **Acquisition date** - When you got them
* **Cost basis** - What you paid per token
* **Payment currency** - What currency you used
* **Transfer type** - How you acquired them

## Why Lots Matter

### Tax Reporting

When you sell tokens, you need to report:

* **Capital gain/loss** = Sale price - Cost basis
* **Holding period** = Sale date - Acquisition date
* **Long-term vs short-term** = > 1 year or < 1 year

**Lots provide all this data automatically.**

### Tax Optimization

With multiple lots, you can choose which to sell:

* **FIFO** - First In, First Out (sell oldest first)
* **LIFO** - Last In, First Out (sell newest first)
* **Specific ID** - Choose exact lots to sell
* **Highest cost** - Sell highest cost basis first (minimize gains)

### Regulatory Compliance

Securities regulations require:

* **Accurate record keeping** - Know when each share was acquired
* **Holding period tracking** - For Rule 144, Reg D restrictions
* **Cost basis reporting** - For IRS Form 8949

**Lots make compliance automatic.**

## How Lots Work

### Lot Creation

A new lot is created when you:

1. **Receive tokens** from an offering
2. **Are issued tokens** by an issuer
3. **Purchase tokens** in a secondary sale
4. **Receive a gift** of tokens

Each event creates a **separate lot** with its own metadata.

### Example

You buy Class A shares three times:

**January 1, 2024:**

* Buy 100 shares @ $1.00 each
* Lot 1: 100 shares, $1.00 cost basis, Jan 1 2024

**March 1, 2024:**

* Buy 50 shares @ $1.50 each
* Lot 2: 50 shares, $1.50 cost basis, Mar 1 2024

**June 1, 2024:**

* Buy 200 shares @ $0.75 each
* Lot 3: 200 shares, $0.75 cost basis, Jun 1 2024

**Total:** 350 shares across 3 lots.

### Viewing Lots

In CapSign, navigate to a token to see:

* **Total balance** - All lots combined (350 shares)
* **Individual lots** - List of each lot with details
* **Cost basis** - Per-lot and weighted average
* **Acquisition dates** - For holding period calculation

## Transfer Types

Each lot has a **transfer type** indicating how you acquired it:

### Purchase

You bought the tokens with money.

**Cost basis:** Price paid **Tax treatment:** Capital asset

### Gift

You received tokens as a gift.

**Cost basis:** Donor's cost basis (carried over) **Tax treatment:** Special gift rules apply

### Grant

You received tokens as employee compensation.

**Cost basis:** $0 (typically) **Tax treatment:** Ordinary income at vest

### Exercise

You exercised stock options.

**Cost basis:** Strike price paid **Tax treatment:** Depends on option type (ISO vs NSO)

### Other

Custom transfer type for special situations.

## Selling Tokens

### Choosing Lots to Sell

When you transfer/sell tokens, you choose which lot:

1. Navigate to token
2. Click **Transfer**
3. **Select lot** to transfer from
4. Enter quantity and recipient
5. Confirm transaction

The app shows each lot with:

* Quantity available
* Cost basis
* Acquisition date
* Days held

### Tax Optimization Strategies

#### FIFO (First In, First Out)

Sell oldest lots first.

**Good for:**

* Long-term capital gains (lower rate)
* Simple accounting

**Example:** Sell Lot 1 first (Jan 1 purchase).

#### LIFO (Last In, First Out)

Sell newest lots first.

**Good for:**

* Minimizing gains in up market
* Harvesting short-term losses

**Example:** Sell Lot 3 first (Jun 1 purchase).

#### Highest Cost First

Sell lots with highest cost basis first.

**Good for:**

* Minimizing capital gains
* Loss harvesting

**Example:** Sell Lot 2 first ($1.50 cost basis).

#### Specific Identification

Choose exact lots based on your situation.

**Good for:**

* Complex tax planning
* Optimizing for specific goals

**Requires:** Careful record keeping (CapSign handles this automatically).

### New Lot for Recipient

When you transfer tokens:

1. **Your lot** - Quantity reduced
2. **Recipient's new lot** - Created with:
   * Their acquisition date (transfer date)
   * Their cost basis (negotiated price)
   * Their payment currency
   * Transfer type (usually "Purchase")

**This means:** Recipient's lot is independent of yours.

## Reporting for Taxes

### Form 8949

When you sell tokens, report on IRS Form 8949:

| Description | Date Acquired | Date Sold  | Proceeds | Cost Basis | Gain/Loss |
| ----------- | ------------- | ---------- | -------- | ---------- | --------- |
| 100 CSA     | 01/01/2024    | 12/01/2024 | $150     | $100       | $50       |

**CapSign provides all this data.**

### Export Lot Data

Export your lot history for your accountant:

1. Navigate to token
2. Click **Export**
3. Choose format (CSV, PDF)
4. Send to accountant

## Lot Operations

### Splitting Lots

When you transfer part of a lot:

**Before:**

* Lot 1: 100 shares @ $1.00

**Transfer 30 shares:**

* Your Lot 1: 70 shares @ $1.00 (remaining)
* Recipient's new lot: 30 shares @ $2.00 (if sold for $2.00)

**Note:** Your cost basis stays $1.00 on remaining shares.

### Merging Lots

**You cannot merge lots.** Each lot must stay separate for tax compliance.

**Example:** If you buy twice at different prices, you'll always have 2 lots (even same date).

### Adjusting Lots

Made a mistake in cost basis?

1. Navigate to lot
2. Click **Adjust**
3. Enter correct cost basis
4. Old lot invalidated
5. New lot created

**Note:** Creates audit trail - old lot visible as "invalidated."

## Advanced Topics

### Gifting Tokens

When you gift tokens:

**Your side:**

* Lot quantity reduced
* No taxable event (generally)

**Recipient side:**

* New lot created
* **Cost basis = your cost basis** (carried over)
* **Acquisition date = your date** (for long-term holding)
* Transfer type = "Gift"

**Important:** Consult tax advisor for gift tax implications.

### Employee Grants

Employee stock grants with vesting:

**At grant:**

* Lot created with 0 cost basis
* Vesting schedule attached

**At vest:**

* Ordinary income = FMV at vest
* Cost basis = FMV at vest (for future sales)

**At sale:**

* Capital gain/loss = Sale price - Cost basis
* Holding period starts at vest

### Complex Scenarios

#### Wash Sales

If you sell at a loss and rebuy within 30 days:

* Wash sale rule applies
* Cost basis adjusted
* CapSign doesn't automatically detect this - consult accountant

#### Like-Kind Exchanges

Exchanging one security for another:

* May defer gains
* Lots carry over
* Consult tax advisor

## FAQs

**Q: Why can't I merge lots?** A: Tax regulations require separate lots for different acquisition dates/prices.

**Q: What if I don't know my cost basis?** A: You must track it. Without cost basis, IRS assumes $0, maximizing your tax.

**Q: Can I delete a lot?** A: No. Lots are permanent for audit trail. You can invalidate and create corrected lot.

**Q: What if I received tokens before CapSign?** A: Migrate to CapSign by issuing with historical cost basis and acquisition date.

**Q: Do I need lots if I never plan to sell?** A: Yes. Required for estate planning, gifting, and compliance.

**Q: How accurate is the cost basis data?** A: As accurate as the data entered at issuance. Verify with your records.

## Need Help?

* **Tax Questions:** Consult a tax professional
* **Technical Support:** <support@capsign.com>
* **Twitter:** [@CapSignInc](https://twitter.com/CapSignInc)


---

# Agent Instructions: Querying This Documentation

If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question.

Perform an HTTP GET request on the current page URL with the `ask` query parameter:

```
GET https://capsign.gitbook.io/capsign/tokens/lot-based-accounting.md?ask=<question>
```

The question should be specific, self-contained, and written in natural language.
The response will contain a direct answer to the question and relevant excerpts and sources from the documentation.

Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.