Cost Basis Methods: FIFO, HIFO & Specific ID — Pick Before You Sell

Short answer: Your cost basis method decides which purchase lot you are treated as selling – and can swing your tax bill by thousands on identical trades. FIFO, the IRS default, sells your oldest, often cheapest lot first. HIFO sells your highest-cost lot, minimizing gains. Specific ID lets you name the lot at sale time. Since 2025, basis must be tracked wallet-by-wallet, and pre-2025 holdings had a safe harbor allocation under Revenue Procedure 2024-28.

Buy the same coin at $10, $30, and $60, then sell one unit at $50. Which purchase did you sell? The answer depends on your cost basis method – and it can change your tax bill by thousands.

How do FIFO, HIFO and Specific ID compare?

FIFO (first in, first out – the IRS default if you don’t specify) sells the $10 lot: a $40 gain. HIFO (highest in, first out) sells the $60 lot: a $10 loss. Specific ID lets you name the exact lot at the time of sale.

What changed for cost basis in 2025?

Since 2025, new IRS rules require wallet-by-wallet (per-account) basis tracking and adequate identification of units sold – the old “universal wallet” pooling approach ended, with a safe harbor allocation for pre-2025 holdings (Rev. Proc. 2024-28). Whatever method you use, it must be applied consistently and be supportable from your records or your exchange’s standing order.

How should I choose and apply a method?

Practical approach: decide your method before year-end harvesting season, set it in your tax software, and keep the lot-level report with your return. Changing methods retroactively to chase the lowest bill is where audits start. If you plan to harvest losses, see our tax-loss harvesting guide.

Frequently asked questions

What is the default cost basis method for crypto?

FIFO (first in, first out) is the IRS default if you don’t specify: it sells your oldest lot first – often the cheapest, producing the largest gain.

What changed for cost basis in 2025?

Since 2025, new IRS rules require wallet-by-wallet (per-account) basis tracking and adequate identification of units sold. The old “universal wallet” pooling approach ended, with a safe harbor allocation for pre-2025 holdings under Rev. Proc. 2024-28.

Can I switch methods each year to pay less tax?

No. Whatever method you use, it must be applied consistently and be supportable from your records or your exchange’s standing order. Changing methods retroactively to chase the lowest bill is where audits start. Decide your method before year-end harvesting season and set it in your tax software.

Related guides

• Crypto Tax-Loss Harvesting: How It Works & the Wash Sale Question
• How to Report Crypto on Your Taxes: Form 8949 & Schedule D, Step by Step
• Short-Term vs Long-Term Capital Gains: Why the 1-Year Line Matters

Sources

• IRS Rev. Proc. 2024-28 – safe harbor for allocating basis of digital assets held before 2025.
• IRS digital asset broker regulations – basis rules for digital assets.
• IRS Publication 550 – investment income and expenses.

This guide is general education only – not tax, legal or financial advice. Verify with the source authority and a qualified tax professional before filing.