Cost Basis Methods for Crypto Accounting: LIFO, FIFO, and HIFO Explained
TL;DR
Choosing the right cost basis method—FIFO, LIFO, HIFO, ACB, LCFO, Specific Identification (Spec ID), or LGUT—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, potentially triggering 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 typically require specific identification under various international tax rules.
Additional methods like ACB (Average Cost Basis), LCFO (Lowest-Cost, First-Out), Specific Identification, and LGUT (Loss Gain Utilization) can further optimize tax outcomes but may not be permitted in every country.
Companies dealing with high transaction volumes need automated accounting solutions (like Integral) to track and apply cost basis rules accurately.
Always check your local regulations: some countries allow multiple methods (e.g., the U.S. and Australia), while others (like Canada and France) mandate specific approaches (ACB and weighted average, respectively). The UK follows “share pooling” rules.
Understanding Cost Basis in Crypto Accounting
For companies managing digital assets, cost basis refers to the original value of acquired crypto (including transaction fees), which is used to determine capital gains or losses upon sale. As many tax authorities classify crypto as “property,” it’s crucial to track cost basis for accurate tax reporting.
Selecting the right cost basis method can be the difference between optimizing your tax obligations and overpaying on gains. However, certain methods (like LIFO, HIFO, or LCFO) generally require specific identification of the exact units sold. If you cannot specifically identify which units you’re selling, many jurisdictions default to FIFO or another mandated method (such as share pooling in the UK or ACB in Canada).
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 2024)
1 BTC for $40,000 (June 2024)
Sells 1 BTC for $45,000 (December 2024)
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.
Where Is FIFO Allowed?
United States: Allowed by the IRS (and often the default when specific identification is not used).
UK: The UK has share pooling rules, which essentially create an average cost for pooled assets, but if the share pooling rules do not apply (or certain short-term rules don’t trigger), the outcome might resemble FIFO in practice.
Australia: Explicitly allowed by the ATO, often used alongside ACB.
Canada: The CRA mandates ACB (adjusted cost base) as the official standard for identical properties, so a pure FIFO approach is not typically recognized for final tax calculations.
Other Jurisdictions: Often accepted in principle, but confirm local guidelines.
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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.
Where Is LIFO Allowed?
United States: Permitted under the IRS, but only with specific identification and proper records.
Australia: Typically not recognized for final tax reporting.
Other Countries: Some allow it implicitly if specific identification is permitted, but many do not address it directly. Always verify.
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RELATED STORIES
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 2024)
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.
Where Is HIFO Allowed?
United States: Allowed if you comply with the IRS’s Specific Identification rules.
Other Jurisdictions: Depends on whether specific identification is recognized. Many do not formally sanction HIFO but also don’t forbid it if you can prove the lot identification.
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ACB: Average Cost Basis
How It Works
ACB combines all identical assets into a single average purchase price. Whenever you acquire or dispose of those assets, you recalculate the average.
Example
You hold 3 BTC total:
0.5 BTC @ $30,000 + $150 fees → $30,150
1 BTC @ $40,000 → $40,000
1.5 BTC @ $28,000 → $42,000
Total cost = $112,150 for 3 BTC.
ACB per BTC = $112,150 ÷ 3 = $37,383.33.
Pros & Cons
✅ Straightforward once set up, especially for large transaction counts.
✅ Aligns with certain countries’ “pooling” or average methods.
❌ Less control over matching specific lots (e.g., for short-term vs. long-term gains).
❌ Not recognized everywhere for crypto—some jurisdictions prefer or require it, while others default to FIFO.
Where Is ACB Allowed?
Canada: ACB is required for identical property (including crypto).
UK: Uses a variant called “share pooling,” which is functionally similar to average cost but with same-day and 30-day “bed-and-breakfast” rules.
France: Requires a weighted average cost approach (PMPA).
Australia: ATO allows both ACB and FIFO.
United States: Recognizes average cost basis for certain financial assets, but crypto is typically addressed under FIFO or Spec ID methods—though some software does track average costs for internal management.
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LCFO: Lowest-Cost, First-Out
How It Works
LCFO flips the HIFO concept: you sell the lowest-cost units first.
Example
If you have BTC purchased at $30,000, $40,000, and $45,500, and you sell 1 BTC at $45,000:
LCFO picks the $30,000 lot (the lowest cost).
Taxable gain = $15,000.
Pros & Cons
✅ Might be used if you want to dispose of older lots that qualify for long-term holding periods (depending on local laws).
❌ Often increases your near-term tax liability because you’re matching a low cost basis with a higher sale price.
❌ Rarely chosen; can be very unfavourable in rising markets.
Where Is LCFO Allowed?
United States: Theoretically possible under specific identification if you have meticulous records.
Other Jurisdictions: Many do not explicitly address LCFO. In practice, it’s uncommon due to its tendency to increase near-term taxable gains.
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Specific Identification (Spec ID)
How It Works
Spec ID lets you choose exactly which crypto units (lots) you’re selling at any point, assuming you can prove it. It’s the underlying mechanism that enables LIFO, HIFO, LCFO, and other lot-based approaches.
Example
If you hold multiple BTC purchased at varying prices/dates, you can specifically “select” which units to sell for any transaction to optimize your tax outcome.
Pros & Cons
✅ Very flexible, providing the most granular approach to realizing gains or losses.
✅ Facilitates tax-loss harvesting if higher-priced lots are underwater.
❌ Requires comprehensive record-keeping (addresses, timestamps, TXIDs).
❌ Some countries do not explicitly allow it or have complex rules about its usage.
Where Is Spec ID Allowed?
United States: Clearly recognized by the IRS if you keep adequate documentation.
Australia: Generally acknowledged if you can specifically track your assets.
Other Countries: Varies widely—some are silent on the topic, while others have strict pooling rules (like the UK) that limit your ability to “pick” lots.
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LGUT: Loss Gain Utilization
How It Works
LGUT (Loss Gain Utilization) systematically selects the lots that generate the largest loss first, then moves to less-lossy lots (and eventually gains). Essentially a specialized “tax-loss harvesting” approach on steroids.
Example
If multiple BTC purchases are well above current market value, LGUT directs you to sell those losing lots first to realize maximum losses upfront.
Pros & Cons
✅ Maximizes realized losses to offset gains in the same or future tax years.
❌ Not officially recognized in many jurisdictions; it typically relies on the principle of Spec ID.
❌ Complex to implement manually without robust tracking software.
Where Is LGUT Allowed?
Limited Guidance: Rarely addressed explicitly by name. If your tax authority permits Spec ID, LGUT might be feasible in practice—but tread carefully.
Consult a Professional: Since many countries have no direct guidance, advanced strategies like LGUT can invite extra scrutiny.
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Short-Term vs. Long-Term Gains
Many countries (including the U.S.) distinguish between short-term and long-term capital gains.
Short-term gains generally apply to assets held less than one year, often taxed at higher rates.
Long-term gains usually enjoy lower rates if assets are held for a year or more (though the exact timeline varies by country).
Cost basis methods only decide which crypto is sold, not how long you’ve held it—so accurate purchase-date tracking is critical.
Which Cost Basis Method Is Best for Your Business?
Selecting the optimal cost basis method depends on:
Market Conditions
Bull markets often favor LIFO or HIFO to reduce current gains.
Bear markets or volatile conditions might see strategies like Spec ID or LGUT to maximize losses.
Regulatory Compliance
The U.S. explicitly permits multiple methods if specific identification is used.
The UK’s share pooling rules reduce your flexibility to “pick” lots.
Canada mandates ACB for crypto.
Australia recognizes both FIFO and ACB (LIFO is not common).
France uses a weighted average approach (PMPA).
Transaction Volume
High-frequency trading makes manual tracking of lots extremely challenging.
Automated solutions or average methods (like ACB) can be easier for large volumes.
Holding Periods
Optimizing for long-term gains might favor methods that sell older lots first.
Verify local definitions of “long-term” vs. “short-term.”
Country-Specific Rules
United States: Default FIFO, but LIFO/HIFO allowed via Spec ID.
UK: Share pooling + same-day/30-day rules.
Canada: Strictly ACB with superficial-loss rules for crypto.
Australia: Allows FIFO or ACB. LIFO is typically not used.
Always confirm with a local tax advisor.
How Integral Helps You Track Cost Basis Efficiently
Managing cost basis across multiple wallets and exchanges is challenging—especially with specific identification. Integral can help:
Automated Cost Basis Calculation
Supports FIFO, LIFO, HIFO, and ACB, with built-in specific identification.Seamless ERP Integration
Sync crypto data with QuickBooks, Xero, Netsuite, etc., for streamlined accounting workflows.Real-Time Portfolio Tracking
View gains, losses, and inventory in real time across all wallets.Audit-Ready Reporting
Export detailed logs—acquisition dates, cost basis, holding periods, fees—for tax filing.
Don’t Forget Transaction Fees
Any transaction or gas fees for acquiring crypto can increase your cost basis, while fees on selling reduce your proceeds.
Methods like HIFO or Spec ID require especially careful fee tracking across different lots.
Integral automatically incorporates fees in its calculations to keep you compliant.
