Last updated: October 19, 2026 · Applies to the 2026 tax year (returns filed in 2027)
When you’ve bought the same coin several times at different prices, the lot you treat as sold decides your gain, and that can change your tax bill by thousands of dollars on a single sale. FIFO (first in, first out) is the default. HIFO (highest in, first out) usually produces the smallest gain right now. Both are forms of lot selection, and the method that saves the most depends on your holding periods and your tax bracket. This guide compares them with real numbers and explains the rules for choosing.
Key takeaways
- If you don’t identify specific lots, FIFO applies within each wallet or account.
- HIFO, LIFO and any other choice are all “specific identification” and must be made by the time of the sale.
- HIFO usually minimizes this year’s gain, but it can create short-term gains and leaves low-basis coins for later.
- Average cost is not allowed for crypto.
- Through December 31, 2026, you can record your lot choice in your own records; plan to give instructions to your broker after that.
The methods at a glance
| Method | Which lot is sold first | Allowed for crypto? | Typical effect |
|---|---|---|---|
| FIFO | The oldest lot | Yes, the default | In a rising market, larger gains, but more of them long-term |
| HIFO | The most expensive lot | Yes, as specific ID | Smallest current gain or largest loss |
| LIFO | The newest lot | Yes, as specific ID | Often short-term results |
| Specific ID (any lot you choose) | Whichever lot you pick | Yes | Most control, most recordkeeping |
| Average cost | Blended price of all lots | No | Only allowed for mutual fund and similar shares |
Worked example: one sale, three results
Jordan holds 3 BTC in one exchange account, bought in three lots. In November 2026 he sells 1 BTC for $90,000.
| Lot | Bought | Cost |
|---|---|---|
| A | January 2025 | $40,000 |
| B | July 2025 | $100,000 |
| C | February 2026 | $70,000 |
Here is what each method reports, assuming Jordan pays 15% on long-term gains and 24% on short-term gains:
| Method | Lot sold | Gain or loss | Term | Federal tax on this sale |
|---|---|---|---|---|
| FIFO | A | +$50,000 | Long-term | $7,500 |
| LIFO | C | +$20,000 | Short-term | $4,800 |
| HIFO | B | −$10,000 | Long-term | $0, plus a $10,000 loss to use |
On this sale, HIFO is clearly best: it turns a $50,000 gain into a $10,000 loss that can offset other gains, or up to $3,000 of ordinary income a year. The difference between FIFO and HIFO is $7,500 of tax before even counting the value of the loss.
When HIFO isn’t the best choice
HIFO picks the highest cost, not the best tax result. A few situations where another lot wins:
- The highest-cost lot is short-term and still shows a gain. A slightly smaller gain taxed at your ordinary rate can cost more than a larger long-term gain taxed at 15%. Compare the tax, not the gain.
- You are in the 0% long-term bracket this year. For 2026, long-term gains are taxed at 0% up to $49,450 of taxable income for single filers ($98,900 for joint filers). In a low-income year, selling your oldest, cheapest lots can realize gains tax-free and raise the basis of what you hold.
- You expect to be in a higher bracket later. HIFO leaves your cheapest coins for future sales. That defers tax rather than eliminating it; if your future rate is higher, you may pay more overall.
- You want to use losses strategically. Short-term losses offset short-term gains first, which are taxed at higher rates, so which loss you realize matters too.
That’s why many crypto tax tools offer a “tax-optimized” or “minimize tax” setting that weighs holding period as well as cost. It’s still specific identification, and the same timing rules apply.
The rules for choosing a method
1. Identify the lot no later than the sale
Specific identification has to be made by the date and time of the sale. You can’t wait until tax time and then pick whichever lots give the best answer. If you didn’t identify lots in time, FIFO applies.
2. Lots are tracked per wallet or account
Since 2025, you can only choose among lots held in the wallet or account you’re selling from. Jordan couldn’t pick a higher-cost lot sitting in his hardware wallet. Our guide to wallet-by-wallet cost basis explains the rule.
3. How to make the identification at a broker
For coins held on an exchange, the regulations normally require you to tell the broker which units to sell, either per trade or through a standing order. Under IRS relief in Notice 2026-20, for sales through December 31, 2026 you may instead record the identification in your own books and records, either for each sale (by purchase date or price) or as a standing order such as “HIFO” written down before the sale. Unless the IRS extends the relief again, plan to set your method directly with each exchange from 2027.
4. You can use different methods for different sales
Nothing requires one method for life. You can identify lots sale by sale, as long as each identification is made on time and documented. What you can’t do is change an identification after the sale.
How the method affects your 1099-DA
Your exchange reports basis on Form 1099-DA using the lots it believes were sold, normally FIFO unless you set a different method with it. If you identified other lots in your own records under the 2026 relief, your basis will differ from the form. That’s allowed: you report the correct basis on Form 8949 with an adjustment, and keep your written identification as proof. Different lot methods are one of the common reasons a 1099-DA doesn’t match your records.
A practical setup for 2026
- Decide your default for each account (for example, HIFO or tax-optimized).
- Write it down as a dated standing order in your records, before your next sale.
- Set the same method in your crypto tax software for 2026 sales.
- Check whether your exchange lets you choose a cost basis method in its settings, and set it there too.
- Before a large sale, compare the tax under the lots available, especially the holding periods.
- Keep screenshots or exports showing the method in force on each sale date.
Frequently asked questions
Can I switch from FIFO to HIFO for past sales?
No. Lot identification has to be made by the time of each sale. Past sales without a timely identification stay under FIFO. You can switch for future sales.
Is HIFO legal?
Yes. HIFO is simply a way of choosing specific lots, which the rules allow as long as you identify them in time and can show which units were sold.
Does the method matter if I sell everything?
If you sell all your coins in the same year, the total gain is the same under any method. The split between short-term and long-term can still differ, and so can the tax.
For the full filing process, see how to report crypto on your taxes.
Sources
- IRS: Notice 2026-20 (identification relief through 2026)
- Journal of Accountancy: Notice 2025-7 alternative identification methods
- IRS: Revenue Procedure 2024-28 (wallet-by-wallet basis)
- IRS: Revenue Procedure 2025-32 (2026 capital gains thresholds)
- IRS: Instructions for Form 8949
This article is for educational purposes only and is not tax, legal or investment advice. Tax rules depend on your individual situation; consult a qualified tax professional before filing.