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Virtual Currency Investor Accounting Methods: FIFO, LIFO, and What About HIFO?

One of the issues cryptocurrency investors face is determining the income tax consequences of the disposition of thousands of digital assets maintained on numerous exchanges. There are several tracking programs that provide the investor with summaries of the transactions, but may not necessarily generate gain and loss schedules that result in the most efficient tax result. This is not a sales pitch for which program to use, but we wish to provide what accounting “method” options are available to investors.

While we may all be familiar with common methods to account for securities such as FIFO, LIFO, and specific identification, this article will focus on highest in, first out (“HIFO”). The IRS treats cryptocurrencies like property, meaning that anytime you spend, exchange, or sell your digital asset (i.e. tokens) it results in a taxable event. Their gain or loss is measured by the difference between the cost of the crypto, and the market value at the time you spend it. In a market where investors have acquired crypto early in the game or before a large run-up in value, a large gain may result in significant tax consequences. The HIFO method can significantly slash an investor’s tax obligation. When you sell your crypto, you can pick and choose the specific unit you are selling. That means a crypto holder can pick out the most expensive unit of a digital asset (i.e. Ethereum, Bitcoin, etc.) they bought and use that value to determine their tax obligation.

There are specific identification provisions addressing stock (See Treas. Reg. 1.1012-1(c)(2)-(4) for more information). When investors sell multiple assets with different bases, they can either choose to sell the crypto they’ve held the longest first (first in, first out, or FIFO), or sell the newest ones first (last in, first out, or LIFO). Note that FIFO is almost always used with regards to cryptocurrency, because unless you can specifically identify/account for the cryptocurrency you are selling (which is difficult unless detailed records are maintained), it is the treatment that must be used.

The challenge that taxpayers/investors have is maintaining detailed granular accounting records of taxpayer’s transactions, date acquired, and the cost basis of each of the digital assets acquired, sold, etc. so that the calculations to the IRS can be substantiated. If unable to do so, then the IRS could argue a default to the FIFO method which may result in unintended tax consequences.

For more information, please contact your tax professional or the Digital Asset committee at

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