What is FIFO (first in, first out)?

A cost basis method that treats the earliest units you acquired as the first ones sold.

In a rising market it usually produces the largest taxable gain, because the oldest coins carry the lowest basis, and it can produce the longest holding period, which matters where long-term gains are taxed more lightly. The United States Internal Revenue Service treats first in, first out as the default when a taxpayer has not specifically identified units, per its virtual currency guidance. Many jurisdictions mandate it outright.

The mistake is assuming your accounting software's setting is what your tax authority accepts. The method is a matter of law where you live, not a preference, and changing it after the fact rarely works.

How it works

Every purchase creates a tax lot: a quantity, a date, and a cost basis. When you sell, the tax rules decide which lot you sold, and the method is the rule that decides.

Under first in, first out, the oldest lot goes first, then the next oldest, until the sale is covered. Two consequences follow in a market that has risen:

• Larger reported gains now. The oldest units have the lowest basis, so the gain is bigger than under a method that sells recent, higher-basis units.
• Longer holding periods. The units sold have been held longest, which can qualify them for a lower long-term rate where one exists.

Those pull in opposite directions, which is why first in, first out is not automatically the worst outcome even though it usually reports the largest gain.

The United States adds a further wrinkle. Internal Revenue Service guidance in Revenue Procedure 2024-28 requires taxpayers to track basis on a per-wallet and per-account basis rather than pooling everything together, with the change applying from January 1, 2025 (source: Internal Revenue Service Revenue Procedure 2024-28). That changes which lot is even eligible to be sold first; see wallet by wallet accounting.

Other countries take different approaches entirely, from mandatory first in, first out to pooled average cost. Read your own jurisdiction's rule rather than transplanting one.

Example

Illustrative arithmetic. You buy 1 unit at $10,000 in January and 1 unit at $30,000 in June, then sell 1 unit at $40,000 in December. Under first in, first out you sold the January unit: a gain of $30,000, held about eleven months. Under hifo you sold the June unit: a gain of $10,000, held about six months. Same sale, same proceeds, a $20,000 difference in reported gain and possibly a different rate.

Why it matters when you buy

Every purchase you make creates a lot that a future sale will draw from, so buying in many small amounts across several venues makes the accounting materially harder later. Keep dated records from the start and read the rule for your country at the tax pages.

Related terms

cost basis method — the choice this belongs to, hifo — the highest-basis alternative, lifo — the newest-first alternative, specific identification — choosing lots individually, tax lot — what a method selects from, wallet by wallet accounting — the per-account tracking rule.

Questions

Is FIFO required in my country?

It depends entirely on the jurisdiction. Some mandate it, some treat it as the default absent specific identification, and some use pooled averaging instead. Check your tax authority's own guidance.

Does FIFO always mean a higher tax bill?

Not always. It reports larger gains in a rising market, and it also selects the longest-held units, which can attract a lower rate where holding period matters. The net effect depends on both.

Can I change methods later?

Generally not retroactively, and often not without meeting conditions your tax authority sets. Decide before you file, and keep the records that support whichever method you use.