FIFO, LIFO, HIFO Explained – Optimizing Your Crypto Taxes
Understanding how your crypto trades are taxed can make a big difference in how much you owe the IRS.
With the flexibility to choose different accounting methods—FIFO, LIFO, or HIFO—you can optimize your taxable gains and reduce unnecessary tax burdens.
Let’s break down these methods, their tax implications, and what you need to know before the 2025 deadline.
IRS Reporting Updates – What’s Changing?
The IRS issued Notice 2025-7, clarifying that while exchanges like Coinbase, Kraken, and Gemini aren’t yet fully prepared to provide specific identification reporting, investors still have options.
Until the end of 2025, you can continue using LIFO or HIFO without notifying your exchange beforehand, as long as you keep accurate records.
That means you have more control over your tax strategy—but only if you document transactions correctly.
How Crypto Sales Are Taxed
When you sell crypto, the IRS calculates taxable gains based on your cost basis (what you originally paid for the asset).
The method you use to determine which crypto you’re selling—FIFO, LIFO, or HIFO—can significantly impact your tax bill.
Each method prioritizes different transactions, which can either increase or decrease your taxable gains, depending on market conditions. Here’s how they work:
FIFO: First In, First Out
How it works: FIFO assumes you sell your oldest crypto first. This method is the IRS default if you don’t specify another approach.
Example:
- January: Buy 1 BTC at $25,000
- July: Buy 1 BTC at $35,000
- December: Sell 1 BTC for $50,000
Taxable Gain Calculation (FIFO):
- Sale price: $50,000
- Cost basis: $25,000 (first BTC purchased)
- Taxable gain: $25,000
Tax Impact:
- Higher taxes in a bull market because cheaper, older assets are sold first.
- Lower taxes in a bear market when selling higher-priced assets bought at peak prices.
LIFO: Last In, First Out
How it works: LIFO assumes you sell your newest crypto first.
Example:
- January: Buy 1 BTC at $25,000
- July: Buy 1 BTC at $35,000
- December: Sell 1 BTC for $50,000
Taxable Gain Calculation (LIFO):
- Sale price: $50,000
- Cost basis: $35,000 (most recent BTC purchased)
- Taxable gain: $15,000
Tax Impact:
- Reduces taxable gains in a bull market by selling higher-cost assets first.
- Can increase taxes in a bear market if lower-cost assets remain unsold.
HIFO: Highest In, First Out
How it works: HIFO prioritizes selling the crypto with the highest cost basis first, minimizing taxable gains.
This method falls under the Specific Identification Method, which requires accurate records.
Example:
- Buy 1 BTC at $25,000
- Buy 1 BTC at $37,000
- Buy 1 BTC at $42,000
- Sell 1 BTC for $50,000
Taxable Gain Calculation (HIFO):
- Sale price: $50,000
- Cost basis: $42,000 (highest purchase price)
- Taxable gain: $8,000
Tax Impact:
- Most tax-efficient method as it reduces taxable gains by selling the highest-cost assets first.
- Requires accurate tracking to comply with IRS reporting requirements.
Key Takeaways: Which Method Should You Use?
- FIFO: Default IRS method; not ideal in bull markets due to higher taxable gains.
- LIFO: Helps reduce gains during bull runs but can be risky in bear markets.
- HIFO: Generally the best strategy for minimizing taxes, but requires detailed records.
The good news? Until the end of 2025, you don’t need to inform your exchange before using LIFO or HIFO, but keeping accurate records is essential to support your filing.
Safe Harbor Rules & IRS Compliance
Notice 2025-7 provides a grace period allowing investors to use specific identification methods without prior exchange notification.
However, proper documentation is still required for IRS reporting.
How to Stay Compliant:
✅ Track every crypto transaction – Ensure all purchases, sales, and cost bases are documented.
✅ Complete your inventory snapshot – A snapshot of holdings on December 31, 2024 is critical for 2025 tax reporting.
✅ Keep records per IRS Safe Harbor rules – Use reliable software or a tax professional to maintain audit-proof records.
Missed the deadline? CryptoTaxAudit can help you rebuild your records to stay compliant and avoid IRS issues.
Final Thoughts
Choosing the right tax method can significantly impact how much you owe.
With the IRS increasing enforcement, now is the time to optimize your tax strategy and stay ahead of compliance requirements.
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