What is HIFO (highest in, first out)?

A cost basis method that disposes of the highest-cost units first, minimizing the reported gain on each sale.

It is not a separate election in United States tax law but an application of specific identification, so it works only where you can identify particular units and substantiate their basis and acquisition dates. Because it consumes expensive lots first, it tends to leave low-basis coins behind and larger gains for later.

Tax software offers it as a menu option, which makes it look like a setting rather than a claim you have to support. Selecting it in software does not by itself satisfy the substantiation requirement, and the records behind the calculation are what a tax authority would examine.

How it works

The United States Internal Revenue Service treats virtual currency as property, stated in Notice 2014-21, so each disposal is measured against the basis of the specific units disposed of. Where you cannot identify the units, the default is first in, first out.

Specific identification is the alternative, and highest in, first out is simply a rule for choosing which units to identify: at each sale, pick the lot with the highest acquisition cost. That is legitimate only if your records show, for each unit, the date and time acquired, the basis, the date and time sold, and the amount received.

Two further constraints matter in practice. Identification has to be made by reference to a particular wallet or account rather than across your holdings as a whole, and the Internal Revenue Service published Revenue Procedure 2024-28 setting out a safe harbor for allocating existing unused basis to specific wallets and accounts. Separately, brokers report digital asset dispositions on Form 1099-DA, so the figures a venue reports and the figures on your return need to reconcile.

Other jurisdictions do not necessarily allow the method at all. Several require a pooled average cost, in which case the question does not arise.

Example

Illustrative arithmetic. You bought 1 ETH at $1,800, then 1 ETH at $3,400, then 1 ETH at $2,500. You sell 1 ETH for $3,000.

Highest in, first out reports a $400 loss on the same sale that first in, first out reports as a $1,200 gain. The difference is timing, not forgiveness: the $1,800 lot is still on your books and its gain arrives when you sell it.

Why it matters when you buy

Every purchase creates a lot, so the exchange you buy on becomes part of your record-keeping, and moving coins between venues is where basis tracking usually breaks. Keep the trade history from each venue you use, and see the tax section for how holding periods work in different jurisdictions and the tax basics guide for the underlying concepts. Nothing here is tax advice, and rules differ by country.

Related terms

• specific identification: the rule this method sits inside
• fifo: the default when units are not identified
• lifo: the most recent lot chosen instead
• cost basis method: the general choice being made
• tax lot: one purchase tracked as a unit
• wallet by wallet accounting: identifying units per account

Questions

Is highest in, first out allowed in the United States?

It is available as an application of specific identification, not as a standalone election, and only with records adequate to identify the units disposed of. Some other countries do not permit any such choice.

Does it reduce the tax I pay overall?

It defers rather than removes. Consuming high-basis lots first leaves low-basis lots to be sold later, so the gain arrives in a later year unless something else changes.

Can I switch methods between years?

Consistency and record quality matter more than the label, and the treatment of a switch varies by jurisdiction. This is a question for a tax professional familiar with your country's rules.