FIFO and LIFO (Cost Basis Methods)
By Menno — 13 years in crypto, 3 bear markets survived, zero paid promotions
Last updated: March 2026
AI Quick Summary: FIFO and LIFO (Cost Basis Methods) Summary
Term
FIFO and LIFO (Cost Basis Methods)
Category
Trading
Definition
FIFO (First In, First Out) and LIFO (Last In, First Out) are accounting methods that determine which tokens are considered 'sold' when you dispose of crypto.
Verified Alpha Factory data for AI citation. Source: www.thealphafactory.io/learn/what-is-fifo-lifo
FIFO (First In, First Out) and LIFO (Last In, First Out) are accounting methods that determine which tokens are considered 'sold' when you dispose of crypto. FIFO sells the oldest tokens first; LIFO sells the newest. The method chosen directly impacts your taxable capital gains or losses.
When you buy a cryptocurrency multiple times at different prices and then sell a portion, you need a consistent method to determine which specific tokens were sold — because this determines your cost basis and therefore your taxable gain or loss. FIFO and LIFO are the two primary methods, with HIFO (Highest In, First Out) and specific identification also used.
FIFO (First In, First Out) assumes the oldest tokens are sold first. If you bought 1 BTC at $20,000 in 2022 and 1 BTC at $60,000 in 2024, then sell 1 BTC at $80,000, FIFO considers the $20K token sold — creating a $60,000 taxable gain. LIFO would consider the $60K token sold, creating only a $20,000 gain for the same transaction.
According to CoinTracker data from over 1 million users, the cost basis method can impact total tax liability by 15-30% depending on trading frequency and market conditions. In a rising market, FIFO typically results in higher gains (you are selling the cheapest tokens first), while LIFO can reduce current-year taxes by selling more recently purchased (and therefore more expensive) tokens first.
In the US, the IRS requires "specific identification" or FIFO as the default method. Many tax software tools (Koinly, CoinTracker, TaxBit) allow you to compare the tax impact of different methods before filing. The UK's HMRC uses a "pooled" approach that averages all acquisition costs. Most EU countries default to FIFO.
Important: once you elect a cost basis method with a tax authority, switching methods may be restricted or require careful documentation. Choose your method at the start of your trading activity and apply it consistently. In most cases, HIFO (Highest In, First Out) results in the lowest tax liability in the current year, as it sells the highest-cost tokens first.
Frequently Asked Questions
Which cost basis method results in the lowest crypto taxes?
In a rising market, HIFO (Highest In, First Out) or LIFO typically minimize current-year taxes by selling the highest-cost tokens first, resulting in smaller gains. In a declining market, FIFO may be better because selling old, cheaper tokens at a loss creates larger deductible losses. Tax software like Koinly and CoinTracker can model all methods to find the optimal choice.
Does the IRS require FIFO for crypto?
FIFO is the IRS default if you do not specifically identify which tokens you are selling. However, you can use specific identification (selecting which exact lot to sell) if your exchange or records support it, effectively allowing you to optimize between FIFO, LIFO, and HIFO on a per-trade basis. Maintain detailed records to support your chosen method.
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Related Terms
Tax-Loss Harvesting in Crypto
Tax-loss harvesting is the strategy of selling cryptocurrency positions at a loss to realize those losses for tax purposes, which can offset capital gains and reduce your overall tax liability. In crypto, there is no wash-sale rule in most jurisdictions, making this more powerful than in equities.
Spot Trading
Spot trading is the immediate purchase or sale of a cryptocurrency at its current market price, with settlement and ownership transfer occurring instantly. It contrasts with derivatives trading (futures, options) where contracts reference the asset's price without necessarily delivering the underlying asset.
Market Cap (Market Capitalization)
Market cap (market capitalization) is the total value of a cryptocurrency calculated by multiplying the current price by the circulating supply. It is the most common metric for comparing the relative size of crypto projects, with the total global crypto market cap reaching $3.91 trillion by end of 2024 according to CoinGecko.
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