When comparing HIFO, FIFO, and LIFO in crypto accounting, understanding how each cost basis method impacts your taxable gains is essential for smart portfolio management. Each approach determines which coins are considered “sold” first. This directly influences your reported profits and overall tax liability.
Choosing between these accounting methods strategically is key to minimizing taxable gains with the dynamic nature of the crypto market. Knowing how these strategies work and partnering with an expert crypto CPA will help you stay compliant while optimizing your after-tax returns.
What Is FIFO in Crypto Accounting?
FIFO (First-In, First-Out) assumes that the first coins or tokens you purchased are the first ones you sell. It’s the default accounting method in many jurisdictions, including the United States (if no other method is specified). However, FIFO isn’t mandated by the IRS. They allow “specific identification” methods like HIFO if transactions are properly documented. FIFO is widely considered to be the most straightforward and transparent approach.
How FIFO Works in Crypto
Let’s imagine a taxpayer who purchased 1 BTC at $20,000 in January 2024. They then purchased another in January 2025 for $25,000. After this purchase, they sell 1 BTC when its value rises and receive $30,000.
The FIFO accounting method assumes that the trader sold their older holdings first; in this case, the coin purchased for $20,000 in 2024. The taxable gain on this transaction would be ($30,000 – $20,000) = $10,000.
This amount would be subject to either short-term or long-term capital gains tax, depending on the date of the sale. Assets only benefit from long-term capital gains treatment if they’ve been held for more than a year.
Pros and Cons of FIFO for Crypto Traders
Consider the following pros and cons before selecting FIFO as your accounting method:
| FIFO PROS | FIFO CONS |
| Simple accounting method that’s widely accepted by international tax authorities. | Leads to higher taxable gains when older purchases are cheaper. |
| Facilitates clear record-keeping as transactions are recorded chronologically. | May not be tax-efficient in markets where asset prices have risen considerably over time. |
| Often leads to long-term capital gains treatment, which is taxed at lower rates. |
Pro tip: The easiest way to ensure you choose the right cost basis method is to engage crypto CPA services. A tax professional with proven success in crypto will advise you on the most favorable option.
What Is LIFO in Crypto Accounting?
LIFO (Last-In, First-Out) is based on the assumption that the most recently purchased cryptocurrency is sole first. It’s less commonly used than FIFO, but offers advantages in certain market conditions. For example, it is particularly beneficial at times when crypto prices are increasing significantly.
LIFO is permitted under U.S. Generally Accepted Accounting Principles (GAAP) for inventory accounting, but not underInternational Financial Reporting Standards (IFRS).
It’s important to note that cryptocurrencies are generally treated as intangible assets, not inventory. Despite this, traders sometimes apply LIFO principles to determine which units are sold for tax cost basis calculations.
How LIFO Works for Crypto
Let’s use the same example as before, with BTC purchases costing $20,000 and $25,000 in different years, and sold for $30,000. LIFO assumes the taxpayer sold their most recent purchase (in this case, the BTC purchased for $25,000). The result is a taxable gain of $5,000 ($30,000 – $25,000).
Pros and Cons of LIFO for Crypto Traders
Be aware of the following pros and cons when using LIFO for crypto tax reporting:
| PROS | CONS |
| Likely to lead to lower taxable gains if recent purchase prices are higher. | Not permitted in countries where following IRFS accounting principles is required. |
| Offers tax planning flexibility, especially for traders who buy and sell frequently. | Likely to result in higher taxable gains when recent purchases were cheaper than older ones. |
| LIFO simplifies crypto tax-loss harvesting in a falling market since more recent (and likely higher-cost) purchases can be sold to realize smaller or negative gains. | Potential to complicate qualification for long-term capital gains treatments, as it increases the likelihood that assets held for less than a year are sold first. |
What Is HIFO in Crypto Accounting?
HIFO (Highest-In, First Out) works on the principle that coins with the highest cost basis are sold first. This makes it one of the most tax-efficient accounting methods, especially for active traders with a large volume of transactions. Research also suggests HIFO is beneficial during periods where returns are more volatile. The volatility of the market leads to a wider range of choices when disposing of their assets (page 6 of the PDF).
HIFO isn’t explicitly named in IRS publications, but it’s a form of “specific identification” accounting that’s allowed if you can substantiate which units were sold with detailed transaction records.
How HIFO Works for Crypto
Let’s run with the previous examples, but add one more purchase into the mix. Remember, the taxpayer purchased 1 BTC for $20,000 in January 2024 and another for $25,000 a year later. Let’s imagine the same trader bought another BTC in June 2024 for $28,000. They also sold 1 BTC for $30,000 in February 2025.
Applying HIFO means the trader sold the BTC purchased for $28,000 first, resulting in a $2,000 taxable gain ($30,000 – $28,000).
Pros and Cons of HIFO for Crypto Traders
Your crypto CPA will take you through the implications of applying HIFO to your crypto transactions, including:
| PROS | CONS |
| Minimizes realized gains, reducing your overall tax liability (especially in rising markets). | Requires meticulous record-keeping and cost tracking across all transactions. |
| Maximizes after-tax profits, especially when markets are volatile or when prices are rising. | Potential to reduce the number of long-term holdings, limiting long-term capital gains benefits if high-cost gains are continually sold first. |
| Particularly appealing for traders who purchase frequently at varying prices. |
The Average Cost Method for Crypto Accounting
The average cost method uses the average cost of all your crypto assets as its cost basis. Therefore, a trader who spends $50,000 on 2 BTC would have an average cost of $25,000 per BTC. Selling a coin for $35,000 would create a taxable gain of $10,000.
The main advantage of this crypto accounting method is that it ensures consistency across transactions. However, traders find it less flexible in terms of tax planning than FIFO, LIFO, and HIFO.
Be aware that this method is the only accepted method for calculating cryptocurrency gains and losses in Canada. This is important for traders who have tax obligations both in the U.S and Canada.
Which Is the Best Cost Basis Method for Crypto (and When?)
The best cost basis method will vary from trader to trader. Different accounting methods align better or worse with each individual’s goals, trading habits, and the prevailing market conditions. Discuss your short- and long-term goals with your CPA, who will advise you on the method that best aligns with your circumstances.
The following rules of thumb are a good starting point for understanding which approach could be best for you:
- FIFO is ideal for long-term investors who prefer simplicity and want to benefit from lower long-term capital gains tax rates.
- LIFO helps people focusing on short-term trades to reduce taxes during rising markets. However, its use is restricted in some jurisdictions.
- HIFO generally offers the lowest tax liability by disposing of the highest-value coins first. Traders must keep detailed records to ensure transparency.
- Average cost is mandatory in some countries and provides consistency across all holdings.
Active traders often prefer HIFO for immediate tax efficiency, while long-term holders tend to stick to FIFO for easier compliance and lower audit risk. While HIFO generally minimizes immediate taxable gains, the “best” method depends on your overall holding period, market conditions, and record-keeping capabilities.
Which Method Offers the Biggest Tax Savings?
In many cases, HIFO results in the most significant immediate tax savings for crypto traders because selling the highest-cost first minimizes realized gains. However, the optimal method depends on your overall strategy.
As a general rule:
- HIFO is most favorable for optimizing your short-term tax bill.
- FIFO is favored by those seeking simplicity and long-term holding strategies.
- LIFO is worth considering for moderate savings in specific market cycles.
Choosing the right accounting method makes a considerable difference to your after-tax returns. Work with a qualified crypto CPA to ensure you take advantage of the most tax-efficient method that meets your investment goals.
Can Crypto Traders Change Accounting Methods?
Yes, crypto traders can change accounting methods if they receive IRS approval, or by filing correctly under the new method from the start of a new tax year. Fill in Form 3115 (Application for Change in Accounting Method) to switch.
It’s inadvisable to change your calculation method mid-year without disclosing the change to the IRS. Inconsistent reporting could trigger audits or penalties. Run your ideas by your CPA before making any changes.
Cost-Basis FAQs for Crypto Traders
Per-Wallet vs Universal Cost Basis: Which Is Best?
Traders can use a per-wallet or universal cost basis approach when tracking crypto across different wallets or exchanges:
- Per-wallet: Each wallet or exchange is treated separately for accounting purposes. This is an easy way to track transactions, but it could limit optimization.
- Universal: All your wallets and exchanges are treated as a single pool of assets. This allows you more flexibility when choosing which coins to sell.
The IRS does not explicitly demand per-wallet tracking. However, consistent application of your chosen method across wallets and exchanges is best if you ever need to defend your position during an audit.
Are Crypto-to-Crypto Wallet Transfers Taxable?
Transferring crypto between your own wallets or exchanges isn’t a taxable event, as you still own the assets. However, you must keep clear records showing that the asset is still in your control. The cost basis (fair market value of crypto at the time of receipt + fees) and the acquisition date of the coins you carry over to a new wallet.
Optimize Your Approach to Crypto Taxes
Selecting the right accounting method for your digital assets keeps you compliant and helps you build a strategy that supports your financial goals. The approach you choose can significantly affect how much profit you retain after taxes.
Keeping detailed records and understanding how each method impacts your returns are key to making smarter, more confident decisions. Working with an expert crypto CPA ensures your reporting stays accurate and your strategy remains optimized for the future.
