What Is LIFO, FIFO, and HIFO? Crypto Accounting Methods

At TokenTax, we regularly hear questions about crypto accounting methods as people try to determine the pros and cons of LIFO vs FIFO and which to use. The IRS usually defaults to First In, First Out (FIFO). Still, there are cases where Last In, First Out (LIFO) or Highest In, First Out (HIFO) might work better, especially if you’ve documented everything meticulously.

At TokenTax, we help our users sort through these nuances. We offer data import tools, custom tax reports, and expert guidance to ensure you choose the most effective strategy. By tracking your crypto tax lots carefully, which you should always do. You may be able to lower your taxable gains.

In the US, profit from selling or trading crypto is treated as a capital gain. If you sell for less than your purchase price, it’s a capital loss, something that can offset other gains. Your cost basis is simply how much you paid for the asset initially.

The twist here is that the IRS lets you decide which coins (or “tax lots”) you’ve sold, as long as you follow certain rules. That’s where FIFO, LIFO, and HIFO come in. Each method changes your cost basis in a different way, which can significantly alter your tax results. Here’s the catch: if you haven’t been tracking your crypto thoroughly, the IRS assumes you’re using FIFO.

With proper record-keeping, you can consider LIFO or HIFO, both of which might shrink your tax bill. The choice depends on many factors, such as how much your coins have appreciated and what your personal financial goals are. Our TokenTax crypto tax software (backed by real human expertise) can help you figure it all out.

Pro tip
Are you a US taxpayer active in crypto? Bookmark our article that covers the tax rates for cryptocurrency to plan for this and every tax season.

In simple terms, these methods govern the sequence of which coins are sold first:

• FIFO (First In, First Out): You treat your oldest purchased coins as the first ones sold.

• LIFO (Last In, First Out): You sell your most recently acquired coins first.

• HIFO (Highest In, First Out): You sell the coins with the highest purchase price first.

Regardless of which one you pick, the IRS wants consistency for that year’s return. Keep in mind: you’re allowed to choose your method each year, but you need solid documentation for anything besides FIFO.

What is FIFO?

FIFO stands for First In, First Out. Think of it like rotating milk in a grocery store: the oldest in the fridge, the oldest out front. It’s often the easiest way to handle your records, and the IRS uses it by default if you don’t specify a different method.

What is FIFO, and how does it work?

Under FIFO, the coins you bought first are the ones considered “sold” first. Let’s say you bought two ETH over time, one at $2,000 and another at $3,000, then sold one ETH later at $3,500. With FIFO, you’re selling the $2,000 ETH, leading to a $1,500 gain.

What are the advantages of FIFO?

For one, it’s straightforward. You don’t have to prove exactly which coins you sold if you’re using FIFO as your default. Some people also prefer FIFO if they’re not doing that much active trading. H

owever, if you’re the type who’s hunting for ways to reduce your tax liability in a bull market, FIFO might not be the most cost-effective choice.

What is LIFO?

LIFO means Last In, First Out. Instead of selling your oldest coins first, you sell the most recently acquired coins first. This can be helpful when prices have increased over time, because you’re effectively “matching” a higher cost basis against your sale price.

Is LIFO better than FIFO?

It can be, depending on market conditions. If prices climb steadily, LIFO may let you sell the newer, higher-cost coins first, minimizing your gains at the time of sale. But if prices are falling, or if you’re trying to lock in short-term gains, FIFO might still be your friend. It’s all about your goals and your outlook on where the market is headed.

What is LIFO, and how does it work?

With LIFO, you assume the coins purchased most recently are the first out the door. Suppose you buy Bitcoin at $25,000, then buy another round at $40,000, and you finally sell one BTC at $45,000. Under LIFO, you treat that sale as if you sold the $40,000 coin, logging only $5,000 in gains. Meanwhile, your $25,000 coin is still on the books, which could result in a bigger gain (or a bigger loss) whenever you eventually sell it.

What is HIFO?

HIFO stands for Highest In, First Out. Among all the coins you hold, you sell whichever ones had the highest purchase cost. For many folks, this can lower the tax hit because you’re “giving up” your most expensive holdings first, leaving you with a smaller difference between your cost basis and sale price.

What is HIFO, and how does it work?

Let’s say you bought three separate batches of the same token:

• 1st batch at $10 each,

• 2nd batch at $20 each,

• 3rd batch at $30 each.

You sell a chunk of that token at $35 apiece. HIFO says you sell from the $30 batch first, which produces only a $5 gain per token. That might help you keep your taxable gains down, especially if you expect to sell off lower-cost batches in a different tax year.

What is the average cost method in crypto accounting?

In the US, the average cost is not the default for reporting. US reporting generally relies on specific identification when you can substantiate the exact units disposed, and FIFO when you cannot.

Canada generally uses an adjusted cost base approach for identical properties, which effectively pools the cost of the same crypto asset across purchases.

The UK uses pooling rules (often called the Section 104 pool) and specific matching rules, such as same-day and 30-day matching, so it is not as simple as a single “average cost” method.

What is the best cost basis method?

There’s no one-size-fits-all. Some people opt for FIFO because it’s simple, while others prefer LIFO or HIFO to try to reduce their gains, especially during a market upswing. A big part of the decision comes down to whether you expect prices to keep climbing, how you plan to use your coins, and if you anticipate any big changes in your income or tax bracket. Our TokenTax tools can run the numbers for various methods so you can compare scenarios.

Can I switch my accounting method?

For US taxpayers, the key rule is supportability. If you can specifically identify which units you disposed of and keep adequate records, you can report using specific identification (including lot-ordering approaches such as HIFO or LIFO).

If you cannot substantiate specific identification, taxpayers generally fall back to FIFO. If you change how you select lots, keep clear documentation so your reporting stays consistent with the records you can prove.

When it comes to juggling different accounting methods, we’ve got you covered:

• Data syncing: Easily import your transactions from any exchange or wallet, so you’re not stuck with tedious manual entry.

• Detailed reports: We’ll generate both standard and advanced calculations (FIFO, LIFO, HIFO, our proprietary Minimization method, you name it) to show where your capital gains stand.

• Reconciliation services: If you’re dealing with missing cost bases, an enormous trade count, or confusing cross-chain transfers, our crypto-savvy tax professionals will help you get everything sorted out.

Even if the IRS starts you off with FIFO, you can switch to LIFO or HIFO if you keep detailed, verifiable records. TokenTax lets you track those records seamlessly and choose the path that fits your financial picture.