When you sell Bitcoin, the IRS doesn't dictate which coins you sold. You do — through your cost basis method.
FIFO means you sold your oldest coins first. If you bought in 2020 and again in 2023, FIFO assumes you sold the 2020 coins — your cheapest ones, your biggest gains.
HIFO does the opposite. You sold your most expensive coins first. Same transactions, significantly lower taxable gains.
On a $50,000 position spread across multiple purchase dates, the difference between FIFO and HIFO can be thousands of dollars in taxes on identical transactions.
The catch: you have to opt into HIFO and maintain clean lot records. Most people discover this in April sitting with an accountant trying to reconstruct years of purchases from memory.
If you've been stacking across multiple exchanges and dates, running both calculations before you file is worth the hour it takes.
Happy to answer questions on how the math actually works.
What are the chances of an audit if Bitcoin is involved?
Higher than most people expect. The IRS receives 1099s from Coinbase, Kraken, and most major exchanges automatically, so they already know you have activity. Audits specifically targeting crypto have increased significantly since 2021. The bigger risk isn't the audit itself though, it's going in without clean records. If you can't show your cost basis per lot, the IRS can assume $0 basis on every sale, meaning 100% of proceeds are taxable gains. Clean records are your best defense regardless of method you use.
nice try fed.
only slaves pay taxes
Thanks for reminding me to use non-kyc transactions. I don't remember agreeing to any social contract either.