Crypto Cost Basis Methods Explained

FIFO and specific ID (including HIFO) are the only IRS-allowed crypto cost-basis methods since Rev. Proc. 2024-28 — now tracked wallet by wallet, not pooled.

Updated July 2026 · Educational only, not tax or financial advice

Cost basis is what you paid for a coin — since Rev. Proc. 2024-28 took effect, you can only use FIFO or specific identification, tracked separately for each wallet or account

The same sale can produce a very different taxable gain depending on which coins the IRS treats you as having sold — and since 2025 you can no longer pool basis across wallets to pick the best outcome after the fact

Topic

How-to

Why it matters

The direct answer

Cost basis is what you paid for a coin — the price plus fees — and it's the number subtracted from sale proceeds to find your taxable gain on Form 8949. This is educational only, not tax or financial advice — consult a tax professional. When you bought the same coin at different prices over time, the method you use to decide which units you're treated as selling can change your tax bill significantly, even for an identical sale.

Until the end of 2024, many taxpayers pooled cost basis across every wallet and exchange they used, picking whichever method — First In First Out (FIFO), Last In First Out (LIFO), or Highest In First Out (HIFO) — produced the best result for a given sale. IRS Revenue Procedure 2024-28, issued June 28, 2024, ends that. Starting January 1, 2025, only two methods are allowed, and they must be applied separately to each individual wallet or account rather than pooled across your whole portfolio.

This page explains the two allowed methods, what changed on January 1, 2025, and how to avoid getting defaulted into a method you didn't choose.

How it works

Only two cost-basis approaches survive under Rev. Proc. 2024-28: First In First Out (FIFO) and Specific Identification. FIFO treats the oldest coins in a given wallet as the ones you sold first — simple, but it usually produces the largest taxable gain in a rising market, since your earliest, cheapest purchases get sold off first. Specific Identification lets you choose exactly which coins (lots) you're selling, which is how methods like HIFO (Highest In First Out, selling your most expensive lots first to minimize the gain) or LIFO are actually achieved — they are executions of Specific ID, not separate IRS-recognized methods on their own.

The catch is documentation. Specific Identification only holds up if you made the identification before or at the time of the trade — a written standing instruction with your exchange or wallet tool (for example, 'always sell my highest-cost lot first') set up in advance, not a choice made afterward when you file. Without that kind of pre-trade record, the IRS treats you as having used FIFO by default, whether or not that's what you intended.

The bigger structural change is wallet-by-wallet tracking. Before 2025, many taxpayers used a 'universal' approach, pooling every lot across every exchange and wallet as if it were one account, and picking whichever lot to sell from anywhere in that pool. Rev. Proc. 2024-28 eliminates universal pooling. Each wallet or exchange account must now track its own lots and apply FIFO or Specific ID independently — a lot bought on one exchange can no longer be matched against a sale on a different one.

The procedure also included a one-time safe harbor: taxpayers could allocate their existing, already-pooled basis out to specific wallets and accounts as of January 1, 2025, using a reasonable method, to make the transition. That allocation is now locked in — you cannot go back and reallocate basis between wallets after the fact.

Step by step

1Identify every wallet and exchange account that held crypto as of January 1, 2025 — each one now tracks cost basis independently, not pooled with the others.
2If you hadn't already, use the one-time safe-harbor allocation to assign your existing basis to each specific wallet or account using a reasonable, documented method.
3Decide, per wallet, whether you'll use FIFO (the default, no setup required) or Specific Identification going forward.
4If you want Specific ID (including a HIFO-style approach), set up a written standing instruction with that wallet or exchange's tool before you trade — not after.
5Keep dated records for every lot: purchase date, quantity, price paid, and fees — this is what makes Specific ID defensible if the IRS asks.
6Reconcile each wallet's basis records against any Form 1099-DA the exchange issues, and carry the results into Form 8949 as usual.

When it helps

Specific Identification, done correctly, lets you choose higher-cost lots to sell first (a HIFO-style approach), which can meaningfully reduce a given year's taxable gain.
FIFO requires no setup or standing instructions — it's the automatic default if you don't document anything else, which keeps simple portfolios simple.
The one-time 2025 safe-harbor allocation gave taxpayers a documented, IRS-sanctioned way to transition existing pooled basis into the new wallet-by-wallet system.

Watch-outs

Universal pooling across wallets is gone — a lot bought on one exchange can no longer offset a sale on a different one, which can increase the taxable gain on some sales.
Specific Identification only works with a pre-trade standing instruction; deciding which lot to sell after the fact does not qualify and defaults you to FIFO.
Wallet-by-wallet tracking means more recordkeeping, especially for anyone who moved coins between several exchanges and self-custody wallets over the years.
The January 1, 2025 safe-harbor allocation is a one-time event — you cannot retroactively reallocate basis between wallets after that date.

Common questions

What cost-basis methods does the IRS allow for crypto now?

Since Rev. Proc. 2024-28 took effect on January 1, 2025, only two methods are allowed: FIFO (First In First Out) and Specific Identification. This is educational only, not tax advice. Approaches like HIFO or LIFO are only valid as a form of Specific Identification, backed by a pre-trade standing instruction — they are not separate default methods you can claim after the fact.

What happens if I don't choose a method?

If you don't set up a documented Specific Identification instruction before trading, the IRS treats you as using FIFO by default for that wallet. This applies per wallet or account, not to your portfolio as a whole, since universal pooling ended on January 1, 2025.

Can I still pool cost basis across all my exchanges and wallets?

No. Rev. Proc. 2024-28 eliminated universal pooling starting January 1, 2025. Each wallet or exchange account now tracks its own cost basis independently, and a lot held in one account cannot be matched against a sale in a different account.

What is HIFO, and is it still allowed?

HIFO (Highest In First Out) means selling your highest-cost lots first to minimize the taxable gain on a sale. It's still achievable, but only as an application of Specific Identification — you need a documented, pre-trade standing instruction with that wallet or exchange, applied consistently within that account, not a method chosen retroactively when you file.

What was the 2025 safe harbor, and did I need to do anything?

The safe harbor in Rev. Proc. 2024-28 let taxpayers allocate their existing, previously pooled cost basis out to specific wallets and accounts as of January 1, 2025, using a reasonable method, to transition cleanly into the new wallet-by-wallet system. If you held crypto across multiple wallets or exchanges before that date and didn't make this allocation, it's worth reviewing with a tax professional, since the allocation is now locked in and cannot be redone retroactively.

Does this affect how I fill out Form 8949?

Not the form itself, but it changes what basis figure you enter for each disposal. Once you've determined the correct cost basis per wallet using FIFO or Specific ID, you report each sale on Form 8949 exactly as described in our Form 8949 guide — this page only covers how that basis number is determined in the first place.

Sources

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