Cost Basis Methods for Crypto Accounting: LIFO, FIFO, and HIFO Explained
TL;DR
Choosing the right cost basis method—FIFO, LIFO, or HIFO—can significantly impact your company’s crypto tax liability.
FIFO (First-In, First-Out) is often the default method and may result in older lots being sold first, which could trigger long-term capital gains if held over a year.
LIFO (Last-In, First-Out) and HIFO (Highest-In, First-Out) can reduce taxable gains in rising markets, but require specific identification to comply with IRS rules.
Companies dealing with high transaction volumes or complex wallets need automated accounting solutions like Integral to track, document, and apply cost basis rules accurately.
Understanding Cost Basis in Crypto Accounting
For companies managing digital assets, cost basis refers to the original value of acquired crypto, adjusted by related acquisition costs (e.g., transaction or gas fees), which is used to calculate capital gains or losses when the assets are sold. Since cryptocurrency is classified as property by the IRS and other regulatory bodies, businesses must track cost basis for accurate tax reporting.
Selecting the right cost basis method can mean the difference between optimizing tax obligations and overpaying on gains. However, it’s crucial to note that methods like LIFO and HIFO only apply when you can specifically identify which units you’re selling (e.g., by wallet address, transaction IDs). Otherwise, the IRS default is FIFO. Let’s explore the three most common methods: FIFO, LIFO, and HIFO.
FIFO: First-In, First-Out
How It Works
FIFO assumes that the oldest crypto assets in a company’s holdings are sold first.
Example
A company purchases:
1 BTC for $30,000 (January 2023)
1 BTC for $40,000 (June 2023)
Sells 1 BTC for $45,000 (December 2023)
Under FIFO, the cost basis is $30,000 (the January 2023 purchase). The taxable gain is:
$45,000 – $30,000 = $15,000
Pros & Cons
✅ Widely accepted default if you do not—or cannot—specifically identify your coins.
✅ May result in sales of older coins that could qualify for long-term capital gains if held over one year (which may be taxed at lower rates than short-term gains).
❌ In bull markets, FIFO may result in higher taxable gains when older coins were purchased at a lower price.
LIFO: Last-In, First-Out
How It Works
LIFO assumes that the most recently acquired crypto is sold first, potentially leading to a lower taxable gain in a rising market. However, you must specifically identify which units you’re selling to use LIFO for crypto. Without proper identification, FIFO is the default.
Example (Same Purchases Above)
Instead of selling the $30,000 BTC, LIFO assigns the $40,000 BTC (June 2023) as the cost basis:
$45,000 – $40,000 = $5,000 taxable gain
Pros & Cons
✅ Can reduce immediate capital gains in a bull market by matching higher-cost purchases to sales.
✅ Helps defer tax liability, freeing up capital for reinvestment.
❌ Not automatically allowed—specific identification is crucial. If you cannot specifically identify, the IRS defaults to FIFO.
❌ Rules vary by country; some jurisdictions restrict or do not allow LIFO for crypto at all.
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HIFO: Highest-In, First-Out
How It Works
HIFO aims to minimize taxable gains by always selling the crypto with the highest cost basis first. As with LIFO, specific identification is required to use HIFO.
Example
Let’s add another BTC purchase:
1 BTC for $45,500 (September 2023)
If the company sells 1 BTC for $45,000, HIFO chooses the $45,500 BTC (the highest cost basis). This results in a capital loss of $500 instead of a taxable gain.
Pros & Cons
✅ Minimizes capital gains, which can lead to significant tax savings.
✅ Ideal for companies actively managing large crypto portfolios with the right accounting tools in place.
❌ Requires detailed tracking and record-keeping to remain compliant.
❌ Needs advanced accounting software to maintain accurate specific identification.
Short-Term vs. Long-Term Gains
In the U.S., crypto held for more than one year is typically subject to long-term capital gains rates, while crypto held for less than one year is subject to short-term capital gains rates (often higher). None of the cost basis methods override holding periods—rather, they determine which crypto lot is considered sold. Accurate record-keeping of purchase dates and sales dates is therefore critical.
Which Cost Basis Method is Best for Your Business?
Choosing the optimal cost basis method depends on several factors:
Market conditions: In a rising market, LIFO or HIFO can reduce taxable gains—provided you maintain specific identification.
Regulatory compliance: Some jurisdictions only allow FIFO, and the U.S. requires strict documentation for LIFO or HIFO.
Transaction volume: Companies with high trade frequency should automate cost basis tracking to ensure compliance and accuracy.
Holding periods: Whether your coins are held long-term or short-term significantly affects the ultimate tax rate.
How Integral Helps You Track Cost Basis Efficiently
For crypto-native businesses, manually tracking cost basis—especially with the necessary detail for LIFO or HIFO—across multiple wallets and exchanges is impractical. That’s where Integral comes in.
✅ Automated Cost Basis Calculation – Choose between FIFO, LIFO, and HIFO with specific identification support.
✅ Seamless ERP Integration – Sync crypto transactions with QuickBooks, Xero, and Netsuite.
✅ Real-Time Portfolio Tracking – Monitor realized gains/losses across multiple wallets.
✅ Audit-Ready Reporting – Include transaction fees, holding periods, and all required documentation for tax filing.
Don’t Forget Transaction Fees
Any transaction or gas fees related to acquiring crypto can increase your cost basis, while fees associated with selling can reduce your proceeds, thus affecting your gains or losses. Integral automatically factors in these fees to ensure accurate calculations.
Final Thoughts
The right cost basis method can dramatically impact your company’s tax position. Whether you opt for FIFO, LIFO, or HIFO, Integral helps ensure you stay compliant, optimize tax strategy, and streamline reporting—all while saving time.
