Crypto Cost Basis Methods Explained
Four ways to work out what your crypto cost you — FIFO, LIFO, HIFO, and specific ID — and each one lands on a different tax bill. Worked examples show how the numbers change, and what records each method requires.
When you sell part of a crypto position bought at different prices, one question decides your gain: which coins did you sell? Your cost basis method answers it — and the answer can change your tax bill by thousands. This guide explains the four methods, shows the math, and covers what the IRS expects from your records.
What cost basis is
Your cost basis in a coin is generally what you paid for it, plus purchase fees. Gain = proceeds − basis. When every coin was bought at a different price, basis isn't a single number — it's a set of lots, and your method picks which lots count as sold.
The four methods
- FIFO (first in, first out). You sell your oldest coins first. Simple, and the usual fallback when records don't identify specific units.
- LIFO (last in, first out). You sell your newest coins first. In a rising market this often means higher basis and smaller gains — but newer coins are usually short-term.
- HIFO (highest in, first out). You sell your most expensive coins first, minimizing the gain on this sale. Aggressive but legitimate if your records support it.
- Specific identification. You point to the exact units sold — by date, wallet, and transaction — and use their actual basis. The most flexible method, and the most demanding on records.
Worked example: same sale, four tax bills
You bought 1 ETH three times: $2,000 (Jan), $3,000 (Jun), $4,000 (Dec). In March of the next year you sell 1 ETH for $4,500. Fees ignored for simplicity.
| Method | Coins treated as sold | Basis | Gain |
|---|---|---|---|
| FIFO | Jan lot | $2,000 | $2,500 |
| LIFO | Dec lot | $4,000 | $500 |
| HIFO | Dec lot ($4,000) | $4,000 | $500 |
| Specific ID | Whichever you documented | $2,000–$4,000 | $500–$2,500 |
Same sale, same proceeds — gains from $500 to $2,500. And there's a second dimension: the Jan lot is long-term by March, the Dec lot is short-term. So FIFO gives a larger gain at lower long-term rates, while LIFO/HIFO give a smaller gain at higher short-term rates. The winner depends on your income — run both through our calculator.
Which method should you use?
There's no universally "best" method — it depends on your lots, holding periods, and income. General tendencies:
- FIFO is the simplest and the default when you can't identify specific units. In long bull markets it tends to produce the largest gains — but often long-term ones.
- HIFO usually minimizes the current-year gain, at the cost of leaving low-basis coins (bigger future gains) in your wallet.
- Specific identification lets you optimize deliberately — e.g., sell long-term lots to capture lower rates — but only with airtight records.
Whichever method fits your lots, you can preview what it does to an actual sale with our crypto tax calculator.
The records each method demands
Every method needs: date acquired, amount, cost in USD, fees, and which wallet/exchange held the coins. Specific identification additionally needs you to identify the exact units sold at or before the sale — a note like "sold the 0.5 ETH bought 2025-06-03 on Coinbase" — not reconstructed months later.
One more wrinkle: Treasury's 2024 final broker regulations changed how basis is allocated across multiple wallets and accounts starting in 2025, with transition relief for that year. The rules here are still settling — check current IRS digital-asset guidance before assuming you can pool all wallets together. See what records to keep →
Broker reporting is the other half of the record picture: our Form 1099-DA basis reporting guide covers what brokers report, what they leave out, and why your own records still decide the number.
Can you change methods?
Changing your accounting method isn't like changing a setting — for many taxpayers it requires consistency from the start and, in some cases, formal procedures. The practical takeaway: pick a method early, document it, and get professional advice before changing. Retroactively re-labeling old sales to whichever method gives the lowest tax is not a plan.
Sources
- IRS: Digital assets guidance
- IRS Topic 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions
Keep learning
- Form 8949 for Crypto: Line-by-Line — where basis gets reported.
- 2026 Capital Gains Tax Rates — why holding period matters too.
- Tax-Loss Harvesting Estimator — put losses to work.