The cost basis method you choose changes your tax bill
When you sell crypto, the IRS needs to know which specific coins you sold. Did you sell the ones you bought first (FIFO) or the ones you paid the most for (HIFO)? The answer determines your taxable gain.
FIFO: First In, First Out
FIFO sells your oldest coins first. If crypto has gone up over time, your oldest coins have the lowest cost basis, which means the highest gains.
When FIFO wins: If your earliest purchases were at higher prices than recent ones (bought high, price dropped, then you sell), FIFO gives you a higher cost basis and lower gains.
HIFO: Highest In, First Out
HIFO sells your most expensive coins first. This maximizes your cost basis and minimizes your taxable gain.
When HIFO wins: In most portfolios where crypto has appreciated over time, HIFO produces lower tax bills. You're selling the coins you paid the most for, leaving the cheaper ones for later.
A real example
You bought Bitcoin at three different prices:
Lot 1: 0.5 BTC @ $30,000 (cost: $15,000)
Lot 2: 0.5 BTC @ $50,000 (cost: $25,000)
Lot 3: 0.5 BTC @ $40,000 (cost: $20,000)
You sell 0.5 BTC at $60,000 (proceeds: $30,000).
| Method | Lot Sold | Cost Basis | Gain |
|---|---|---|---|
| FIFO | Lot 1 ($30k) | $15,000 | $15,000 |
| HIFO | Lot 2 ($50k) | $25,000 | $5,000 |
HIFO saves you $10,000 in taxable gains on a single trade.
Can you actually use HIFO?
Yes. Through 2026, IRS Notice 2026-20 gives explicit permission to use any cost basis method on your own records, regardless of what your exchange uses. Most exchanges default to FIFO, but your records control.
Starting in 2027, you'll tell each exchange which method to use at the account level.
The holding period catch
Both methods affect whether gains are short-term (held < 1 year, taxed at income rates) or long-term (held > 1 year, taxed at lower capital gains rates).
HIFO might sell a lot you've held for 11 months instead of one you've held for 2 years. The higher cost basis from HIFO could be offset by the higher short-term tax rate. Good crypto tax software will flag this tradeoff for you.
What CryptoTaxPilot does
CryptoTaxPilot automatically runs both FIFO and HIFO on your full portfolio and shows you the side-by-side comparison. You see exactly how much each method saves, including the short-term vs long-term breakdown. Then you pick the one that's best for your situation.