You sell 0.1 BTC for $90,000. Your gain is not one number. It depends on which units you sold, what you originally paid for those units, and how long you held them. That is the whole game of tax lots and cost basis methods: the same sale can produce very different tax results depending on the lot you designate.
What a tax lot actually is
Every separate purchase of an asset is its own lot, with its own date and its own price. Buy 0.2 BTC in March at one price and 0.1 BTC in August at another, and you hold two lots, not one blended position. When you sell, the tax authority wants to know which lot left your wallet, because that determines the basis subtracted from your proceeds.
Most people never think about this until a sale happens. By then, the default method has quietly decided for them.
The four methods, and what each one does to your gain
Here is the plain-English version of the standard approaches:
- FIFO (first in, first out) — the oldest lot is sold first. Common default. Often produces long-term treatment, but can also produce the largest gain if your earliest buys were cheapest.
- LIFO (last in, first out) — the newest lot goes first. Useful when recent buys were expensive, which shrinks the gain.
- HIFO (highest in, first out) — the most expensive lot is sold first, minimizing gain. Requires good recordkeeping to support.
- Specific identification — you name the exact lot. Maximum control, maximum documentation burden.
A quick comparison of how the choice plays out:
| Method | Which lot sells | Typical effect |
|---|---|---|
| FIFO | Oldest | Often long-term, sometimes bigger gain |
| LIFO | Newest | May reduce gain; often short-term |
| HIFO | Priciest | Smallest gain, heaviest records |
| Specific ID | Your pick | Most control, most paperwork |
Why the holding period rides along with the lot
Each lot carries its own clock. Sell a lot held over a year and you are generally in long-term territory; sell one held under a year and it is short-term, taxed as ordinary income. Method choice is not just about the gain size. It is about which rate applies to it.
Where the rules get fiddly
Crypto is not stock. The specific-identification rules that apply cleanly to securities have been applied to digital assets through IRS guidance and later legislation, and the documentation expectations are real. You cannot just declare “I sold the expensive lot” after the fact with nothing to back it up. Keep lot-level records: date, amount, price, fees, and the sale that consumed it.
A worked scenario with real numbers
Say you bought 0.1 BTC at $30,000 and later 0.1 BTC at $60,000. Now you sell 0.1 BTC for $90,000.
Under FIFO, you sold the $30,000 lot. Gain: $60,000. Under HIFO, you sold the $60,000 lot. Gain: $30,000. Same asset, same proceeds, half the taxable gain — a $30,000 difference created entirely by lot selection. If that second lot had been held under a year, though, the smaller gain would be taxed at the higher short-term rate, and the math could flip. Run both before you decide.
One more trap: exchanges sometimes default to a method you did not choose, and some do not support specific ID at all. Check your account settings before you sell, not after.
How to pick a method without overthinking it
Start with what your platform actually supports. A method you cannot document is a method you cannot defend. From there:
- Pull your full lot history for the year, including fees.
- Model the sale under FIFO and HIFO side by side.
- Compare the after-tax result, not just the raw gain — short-term versus long-term matters.
- Lock in the method before executing, and keep the records.
Platforms like MGBX are built around trade execution and recordkeeping, but the tax method choice is yours to make and defend. No exchange files your return for you.
Frequently asked questions
Can I switch cost basis methods between years?
Generally yes, but the change has to be applied consistently and documented, and it may require IRS approval depending on the circumstances. Do not flip methods mid-year to cherry-pick the best result for each sale. Pick an approach, apply it consistently, and keep records that show you did.
Does specific identification work for crypto the same way it does for stocks?
It is close but not identical. Crypto specific ID relies on IRS guidance and later legislation, and the burden is on you to substantiate which lot was sold with contemporaneous records. Many exchanges do not offer the feature at all, which means you may be stuck with their default. Confirm what your platform supports before relying on it.
What happens if I do not track lots at all?
Your exchange or software will apply a default, usually FIFO, and that default may not be the cheapest option for you. You will also struggle to prove basis if you are audited, which can mean the IRS treats your basis as zero. That is the worst outcome in this whole article — full proceeds taxed as gain.
Do fees change the cost basis?
Acquisition fees are typically added to basis, and sale fees reduce proceeds. Small amounts individually, meaningful in aggregate over hundreds of trades. Include them in your lot records from day one rather than reconstructing them later.
Before your next sale, open your exchange’s tax settings and confirm which method is active. If it is FIFO by default and you never chose it, you have been letting the platform decide your tax bill.