Cost Basis Methods for Crypto — FIFO vs LIFO vs Specific ID

The cost basis method you choose determines which coins you're "selling" — and that choice can mean the difference between a $5,000 tax bill and a $15,000 tax bill on the same transaction.

Model different methods with the Crypto Tax Calculator.

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The Four Methods

All four are accepted by the IRS, but you must be consistent within each asset and keep adequate records.

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Side-by-Side Example

You made three Bitcoin purchases:

Now you sell 1 BTC in March 2026 for $95,000. Which lot are you selling?

In this case, LIFO/HIFO saves $5,400 in taxes. But that's not always the outcome.

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When Each Method Wins

FIFO — Best When Prices Have Risen Steadily

If you bought low and the price only went up, FIFO sells the cheapest (oldest) lots first — creating larger gains. But those gains are long-term (lower tax rate) since the oldest lots have the longest holding period.

Use FIFO when: Long-term capital gains rate (0-20%) is significantly lower than your ordinary income rate (22-37%).

LIFO — Best When Recent Purchases Were Expensive

If you recently bought at a high price and the market pulled back slightly, LIFO uses the expensive recent purchase as your cost basis — minimizing the gain.

Use LIFO when: You've been buying at higher and higher prices and want to minimize gains.

HIFO — Best for Minimizing Gains Overall

HIFO always picks the highest-cost lot, regardless of when you bought it. This always minimizes your realized gain (or maximizes your loss).

Use HIFO when: You want the absolute lowest tax bill on each sale.

Specific ID — Maximum Flexibility

You choose exactly which lot to sell. This lets you:

• Sell long-term lots to get the 0%/15%/20% rate
• Sell high-cost lots to minimize gains
• Sell losing lots to harvest losses
• Balance short-term and long-term gains strategically

Use Specific ID when: You want full control and are willing to maintain detailed records.

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IRS Rules for Specific Identification

To use Specific ID, you must document:

1. At the time of sale, identify which specific coins you're selling
2. Keep records of the date, amount, and price of each lot acquired
3. Keep records of the date, amount, and price of each lot sold
4. Match them explicitly in your records

If you use a crypto tax software, it handles this automatically. If you're doing it manually, you need a clear contemporaneous record — "I sold Lot #3 (purchased July 2025)" at the time of the transaction, not retroactively at tax time.

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Can You Switch Methods?

You can use different methods for different assets. FIFO for Bitcoin, Specific ID for Ethereum — that's fine.

But once you choose a method for an asset, the IRS expects consistency. Switching from FIFO to LIFO mid-year for the same asset creates a messy paper trail.

Best practice: Pick one method per asset at the start of the year and stick with it. Specific ID gives you the most flexibility since you can achieve any of the other methods' results by simply choosing the appropriate lot.

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Practical Comparison — Full Year

Imagine 10 BTC trades throughout 2026. Here's how total tax might differ:

Specific ID optimized means choosing the best lot for each sale — sometimes oldest (for long-term rates), sometimes highest-cost (for minimum gains).

The difference between FIFO and optimized Specific ID in this example: $6,700 saved.

For detailed reporting, see how to report crypto on Form 8949. Use the Capital Gains Tax Calculator to model your specific situation.