FIFO vs LIFO vs HIFO: Choosing the Best Crypto Cost Basis Method

When you sell cryptocurrency, you owe capital gains taxes on the difference between your sale price and cost basis. But which coins are you selling? If you bought at $1,000, $5,000, and $10,000, your tax liability depends entirely on which purchase you match to the sale.

FIFO, LIFO, and HIFO are accounting methods that determine this matching. Choosing correctly can reduce your tax bill by thousands of dollars. Choosing wrong can cost thousands.

Understanding the Three Methods

FIFO (First-In, First-Out):

Assume oldest purchases are sold first

Default method for most tax systems

During bull markets: Creates highest capital gains (selling cheap coins first)

During bear markets: Creates lowest capital gains (selling expensive coins first)

LIFO (Last-In, First-Out):

Assume newest purchases are sold first

Not officially supported by the IRS (use with caution)

During bull markets: Creates lower capital gains (selling expensive coins first)

During bear markets: Creates higher capital gains

HIFO (Highest-In, First-Out):

Assume highest-cost purchases are sold first

Fully IRS-approved if you maintain detailed records

Creates lowest capital gains in most scenarios

Requires specific identification of which coins you're selling

Real-World Impact: How Method Choice Changes Your Taxes

Example: 3 BTC purchases, 2 BTC sold

Purchase history:

Jan 2017: 1 BTC @ $1,000 = $1,000 cost

Jan 2018: 2 BTC @ $9,000 = $18,000 cost

Jan 2019: 5 BTC @ $6,000 = $30,000 cost

Total cost basis: $49,000

Sell 2 BTC in Dec 2024 @ $100,000/BTC = $200,000 proceeds

FIFO approach:

Sell 1 BTC from Jan 2017 (cost: $1,000)

Sell 1 BTC from Jan 2018 (cost: $9,000)

Total cost: $10,000

Capital gain: $200,000 - $10,000 = $190,000 gain

Tax at 24% bracket: $45,600 owed

LIFO approach:

Sell 2 BTC from Jan 2019 (cost: $6,000 each = $12,000)

Total cost: $12,000

Capital gain: $200,000 - $12,000 = $188,000 gain

Tax at 24% bracket: $45,120 owed

Tax savings vs. FIFO: $480

HIFO approach:

Sell 2 BTC from Jan 2018 (cost: $9,000 each = $18,000)

Total cost: $18,000

Capital gain: $200,000 - $18,000 = $182,000 gain

Tax at 24% bracket: $43,680 owed

Tax savings vs. FIFO: $1,920

Difference between FIFO and HIFO: $1,920 in taxes on one trade

Over 20 trades across a portfolio, HIFO can save $10,000-$50,000+ in taxes.

Why HIFO is Usually Superior (When Allowed)

HIFO minimizes taxable gains by intentionally selling the highest-cost coins first—strategically "locking in" lower cost basis coins for later:

Bull market advantage:

Old, cheap coins appreciate dramatically

HIFO sells the expensive recent purchases first

Keeps the cheap, appreciating coins in your portfolio

Defers taxation on the best performers

Bear market advantage:

Selling expensive coins during downturn limits realized gains

Retains cheaper coins for potential recovery

This isn't tax-motivated but strategically sound

The requirement: Detailed record-keeping

Specific identification of which coins are sold (via wallet/exchange records)

Ability to prove which purchase corresponds to which sale

IRS verification through transaction documentation

Without detailed records, you cannot claim HIFO and must default to FIFO.

When to Use Each Method

Use FIFO if:

You lack detailed transaction records

You plan long-term holds (avoid frequent selling)

You want the simplest tax reporting

Your sales pattern doesn't significantly favor other methods

Use LIFO if:

You're in a high-tax jurisdiction willing to take IRS risk

You've kept detailed records

Recent purchases are significantly higher than old ones

Note: IRS support is ambiguous; use caution

Use HIFO if:

You've maintained perfect transaction records

You make frequent trades with mixed cost basis

You want to minimize capital gains taxes

Your oldest purchases are significantly cheaper than recent ones

You can specifically identify which coins you're selling

The Critical Requirement: Record-Keeping

This is where most crypto investors fail:

You must document:

Date of purchase

Price at purchase

Date of sale

Exchange/wallet involved

Specific coins sold (wallet address traceability)

Lack of documentation means:

IRS may force FIFO (highest tax method)

You lose HIFO benefit entirely

Penalties for inadequate records

Potential audit liability

Best practice: Use crypto tax software (CoinTracker, Koinly, Request Accounting) that automatically tracks transactions and can calculate all three methods.

The Change of Method Rule

You can change accounting methods year-to-year, but:

You must be consistent within a single tax year

You must maintain records justifying the change

Frequent changes can trigger audits

Choose one method and stick with it

Switching from FIFO to HIFO mid-year to minimize taxes is riskier than choosing one method and maintaining it.

The Bottom Line: HIFO Saves the Most, FIFO is Safest

HIFO can save $1,000-$50,000+ depending on portfolio size and trading frequency.

But HIFO requires:

Perfect record-keeping

Specific identification at sale time

IRS audit risk tolerance

FIFO is safest because it's the default and requires minimal documentation.

For most crypto investors with significant capital gains, the HIFO tax savings justify the record-keeping burden.

For traders making frequent small trades, FIFO simplicity might outweigh HIFO savings.