FIFO vs. LIFO vs. HIFO: Picking Your Reporting Strategy for Crypto Capital Gains

When you sell or swap crypto, the order in which you match disposals to your purchase “lots” determines your capital-gains bill. The IRS lets U.S. taxpayers choose between First-In-First-Out (FIFO) or a “Specific Identification” method such as Last-In-First-Out (LIFO) or Highest-In-First-Out (HIFO).

The convention you choose can shrink your tax liability or inflate it, so here’s what you need to know about how to choose the strategy best for you.

The rules just got stricter. Why you need to plan ahead.

Until 2024, many investors toggled between methods at year-end to see which produced the lowest bill. That flexibility is disappearing. Starting with the 2025 tax year, you must track cost basis per wallet or account in real time, and FIFO becomes the default if you fail to “specifically identify” lots before you hit sell.

FIFO (First-In-First-Out)

How it works: Oldest coins sold first.

Pros

Cons

• Easiest to administer—many exchanges assume it automatically.

• Aligns with “default” IRS rule, so no extra paperwork.

• Often produces lower gains in a bull market if your earliest purchases were cheap.

• Can inflate taxable gains during bear markets because inexpensive lots are locked in first.

• No flexibility once selected for a year.

Because FIFO is baked into most tax software and broker 1099-DA reporting, it’s the path of least resistance for many casual traders. But in a prolonged downturn, it can force you to recognize large gains you’d rather defer.

In some cases, FIFO may be the best choice if it allows you to realize long-term gains instead of short-term gains, but it also frequently results in the largest total cap gains hit, increasing your tax liability.

LIFO (Last-In-First-Out)

How it works: You sell your most recently acquired units first. LIFO is only available if you meet the IRS's “specific identification” record-keeping test: date, time, cost basis, and FMV for every unit sold.

Pros

Cons

• During a bear market: selling high-basis coins first can wipe out gains, or even generate capital losses that you can deduct.

• Can be a great strategy for frequent traders who rotate in and out of positions every few weeks.

• You'll almost always be realizing short-term gains instead of long-term gains, resulting in a higher tax rate.

• Requires proactive lot selection ahead of time. Many brokers still can't automate this until the 2026 mandate.

HIFO (Highest-In-First-Out)

How it works: You sell the tokens with the highest cost basis first. By definition, this results in the lowest total capital gain and realizes capital losses most frequently.

HIFO is the ultimate tax-minimization play: you always select the unit with the highest cost basis, slashing gains (or maximizing losses) on every trade. The caveat is that you must designate the lot before each disposal and maintain bulletproof records. With the new wallet-based rules, that means tagging lots on-chain or via your exchange’s interface at the moment of execution—no more retroactive magic at year-end.

Side-by-side snapshot

There is no one-size-fits-all strategy that works best for everyone. The right accounting method depends on your specific investments and trading strategy. However, there are some general trends depending on market conditions:

Bull market: FIFO results in lowest tax rate if assets mature to long-term gains, but HIFO may still be the lowest overall tax burden; LIFO usually highest.
Bear market: HIFO or LIFO usually lowest; FIFO highest.

Other things to keep in mind before choosing a convention:

Record-keeping burden: FIFO ★☆☆; LIFO ★★☆; HIFO ★★★.
Long-term holding goals: FIFO helps you reach the 12-month mark for preferential long-term rates sooner because your oldest coins go out first; LIFO/HIFO can keep your tax lots in short-term territory longer.

Compliance checklist for 2025+

Lock your method early. Once you file using a method for the year, you must stick with it unless you file Form 3115 for a change in accounting method.
Tag lots at trade time. Exchanges get relief for 2025, but by 2026 they must accept specific-ID instructions; start the habit now.
Segregate wallets. If you plan to run HIFO or LIFO, dedicate separate sub-wallets to different strategies. Otherwise, transfers can scramble your cost basis.
Document everything. Keep CSV exports, on-chain proofs, and screenshots showing lot selection. Without them, the IRS will re-characterize your trades as FIFO.

How to choose your strategy

Trader profile	Recommended method
Long-term HODLer, dollar-cost averaging	FIFO keeps admin simple and lets the oldest coins hit long-term rates first.
Active swing trader, harvesting losses	HIFO (or LIFO) minimizes gains each round-trip; pair with loss-harvesting rules.
High-volume day trader on a single exchange	LIFO can help smooth volatility and is easier to automate than HIFO, provided your platform supports real-time lot tagging.

Ultimately, the “best” method changes with market cycles and your risk appetite. If you’re unsure, run hypothetical reports in your tax software mid-year; sticking with one method across all wallets for the calendar year avoids headaches at filing time.

Key Takeaway

FIFO is frictionless but not always cheapest; LIFO and HIFO can slash taxes—but only if you’re willing to keep granular records and lock in your choice up front. Review your trading style, forecast the market, and decide before your next disposal so that 2025’s tighter rules work for you, not against you.