FIFO (First In, First Out), LIFO (Last In, First Out), and HIFO (Highest In, First Out) are methods for determining which specific units of crypto you are selling when you have purchased the same token at different prices over time. The method you choose affects how much gain (and therefore tax) you owe on any given sale.
What Is FIFO/LIFO/HIFO Accounting (Mechanics)?
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The short version
You bought ETH at $1,000, then $2,000, then $3,000 at different times. Now you sell some. Which purchase are you selling? FIFO says the oldest (cheapest) one first, making your gain larger. HIFO says the most expensive one first, making your gain smaller. The actual ETH is the same either way, but the accounting method changes your tax bill.
How It Works
FIFO: assume you sell your oldest coins first. If prices have risen over time, FIFO produces the highest gains (and highest taxes) because old cheap coins have low basis. Advantage: simple, widely accepted, default method. LIFO: assume you sell your most recently purchased coins first. If recent prices are close to current prices, gains are smaller. Less commonly used. HIFO: sell the highest-cost-basis coins first. This minimizes your current taxable gain (you are using up your highest-basis lots first, deferring gains). Requires specific identification (tracking which exact lot you are disposing of). In the US: specific identification (which allows HIFO) is permitted if you can adequately identify the specific lot being sold. This usually requires records showing which wallet/lot the disposition came from. Tax software automates this. In the UK: pooling (average cost across all holdings of the same token) is the required method, with a 30-day matching rule. FIFO/LIFO/HIFO are not used in the UK.
Selling 1 ETH under three different methods
Your holdings: Lot A: 1 ETH bought at $1,500 (January 2023). Lot B: 1 ETH bought at $2,800 (June 2023). Lot C: 1 ETH bought at $3,200 (March 2024). You sell 1 ETH today at $3,500. FIFO (sell Lot A first): Gain = $3,500 - $1,500 = $2,000. Long-term capital gains rate applies (held >1 year). At 15% rate: $300 tax. LIFO (sell Lot C first): Gain = $3,500 - $3,200 = $300. Short-term rate applies (held <1 year). At 24% rate: $72 tax. HIFO (sell highest cost first, Lot C): Same as LIFO in this case: $300 gain, $72 tax. Different scenarios produce different optimal methods. If all lots are long-term, HIFO minimizes the gain amount directly. If some lots are short-term (higher tax rate), selling a long-term lot with a slightly larger gain might still result in less tax due to the rate difference.
What People Get Wrong
You must use FIFO
In the US, FIFO is the default if you do not specifically identify lots, but you are allowed to use specific identification (which enables HIFO or LIFO) if you maintain adequate records. Many crypto tax tools offer HIFO as an option and generate the documentation needed.
You can switch methods for each transaction
In the US, you generally need to be consistent within a tax year and maintain records supporting your chosen method. You can choose specific identification for crypto (selecting which lot to sell each time), but you need documentation. Consult a tax professional for your specific situation.
The method does not matter much
For active traders with many lots at different prices, the difference between FIFO and HIFO can be thousands or tens of thousands of dollars in annual tax liability. For someone who bought once and sells once, it does not matter (there is only one lot). The more purchase events you have, the more method choice matters.
Keep Reading
Sources & Further Reading
- CoinTracker
Tax software supporting FIFO, LIFO, and HIFO cost basis methods
- TokenTax
Crypto tax platform with DeFi transaction support and method comparison
Questions People Also Ask
- Which method minimizes my taxes?
- Usually HIFO (selling highest-cost lots first) minimizes current-year gains. But consider: (1) long-term vs. short-term rates (selling a long-term low-basis lot at 15% might beat selling a short-term high-basis lot at 24%), (2) tax-loss harvesting opportunities, and (3) your total income bracket. The optimal strategy depends on your full tax picture, not just one transaction.
- Does crypto tax software handle this automatically?
- Yes. Tools like Koinly, CoinTracker, and TokenTax let you select FIFO, LIFO, or HIFO and calculate your total gains across all transactions automatically. They generate reports compatible with tax filing. Most offer a free tier for limited transactions and paid plans for active traders.
- What method does my exchange report to the IRS?
- US exchanges report gross proceeds (1099-B) but currently do NOT determine cost basis for transfers in (they do not know what you paid elsewhere). Starting in 2025-2026 (per IRS broker rules), exchanges will be required to track and report cost basis for assets acquired on their platform. Until then, you are responsible for your own basis tracking.