Crypto Cost-Basis Methods: FIFO vs HIFO vs LIFO

concept

Core idea

Three lot-selection approaches for computing gains on disposed crypto, decisive in tax-fraud and forfeiture-valuation work. FIFO assigns the earliest-acquired coins to the first disposal and, since Jan 1 2025, is the IRS default for digital assets whenever no valid Specific Identification election was made, tracked per wallet/account rather than pooled (Treas. Reg. Sec. 1.1012-1(j)). HIFO and LIFO are not standalone IRS methods, they are lot-selection strategies within Specific Identification and require proof the identification was made at or before each sale.

Components

FIFO (First-In-First-Out): earliest lot first; IRS default absent a valid specific-ID election; the most defensible baseline; tracked per wallet, not pooled across exchanges.
HIFO (Highest-In-First-Out): highest-cost lot first to minimise reported gain; must be a documented specific-ID election predating each disposal; flag when reported gains look implausibly low relative to acquisition history.
LIFO (Last-In-First-Out): most-recent lot first; rarely tax-advantageous in a rising market, so its appearance in filings is itself a red flag; same documentation burden as HIFO.
Fallback rule: no contemporaneous per-wallet proof means FIFO applies and gains are recomputed upward.
Transitional relief: Notice 2025-7, extended by Notice 2026-20 through 12/31/2026, lets taxpayers satisfy the ID requirement with only their own books, without notifying the exchange, which complicates third-party verification.

When to use

Reconstructing a suspect’s or victim’s cost basis in tax-fraud or asset-forfeiture valuation cases, and deciding whether a claimed HIFO/LIFO position is supportable.

Avoid when

Do not accept a HIFO or LIFO position without contemporaneous per-wallet records proving the election predates each disposal; absent proof, recompute on FIFO.

Example

A suspect reports implausibly low gains claiming HIFO; you demand per-wallet records proving the election predated each sale, none exist, so you recompute on FIFO and the gains rise.

Forensic Method Selection Decision Tree, Crypto Investigation Acronyms & Bodies