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What a tax lot is
A tax lot is simply a recorded purchase, held separately from every other purchase of the same token.
Buy 2 BTC in March at $30,000 and 1 BTC in August at $50,000, and you hold two lots, not "3 BTC". The distinction sounds pedantic until you sell, at which point the method decides which of those two lots leaves the portfolio.
FIFO
First in, first out. Each sale is matched to the oldest lot you still hold.
In the earlier example, selling 2 BTC in February consumes the March lot of 2 BTC at a basis of $60,000. Against proceeds of $160,000 that is a gain of $100,000, and the expensive August and November lots remain in the portfolio at their original basis.
FIFO is the default in many jurisdictions and the most commonly available. Its practical effect is that when a token has risen over time, it realises the largest gain — you are always selling the cheapest coins you own.
LIFO
Last in, first out. Each sale is matched to the most recent lot.
Selling 2 BTC consumes the November lot of 1 BTC at $70,000 and the August lot of 1 BTC at $50,000. Basis is $120,000, and the gain falls to $40,000.
LIFO is useful when prices have been rising, because it leaves the low-basis purchases in the portfolio. It has a significant limitation: it is not accepted for tax reporting in a number of countries, and where it is, it may only be used if you actually maintain the records that demonstrate it. Check before assuming it is available to you.
HIFO and specific identification
Highest in, first out is specific identification with a particular preference: sell the most expensive lots first, which minimises realised gain most aggressively.
Full specific identification is the general form — you choose which lot each sale matches. It gives the most control and therefore the most room for error, because it depends entirely on your records being complete and consistent. An exchange that cannot supply a lot-level history quietly makes this impossible.
Do not assume you can switch methods year to year. Several jurisdictions require consistency, and some require you to state your method in advance. Changing retroactively to reduce a liability is the kind of thing that turns a routine filing into an enquiry.
The three methods side by side
| Method | Matches sales to | Typical effect in a rising market | Availability |
|---|---|---|---|
| FIFO | Oldest lots | Largest realised gain | Widely accepted, often mandatory |
| LIFO | Newest lots | Smallest realised gain | Restricted or unavailable in several countries |
| HIFO | Highest-cost lots | Smallest realised gain | Requires specific identification records |
| Specific ID | Lots you choose | Depends entirely on your choice | Requires complete lot-level records |
Fees are part of the basis
Trading fees are not incidental to the calculation, they sit inside it.
- On a buy: the fee increases what the lot cost you. A $50 fee on a $3,000 purchase makes the basis $3,050, not $3,000.
- On a sell: the fee reduces your proceeds. $160,000 received after a $40 fee is $159,960, and the gain is measured against that.
Across a year of active trading, fees ignored entirely can move a reported gain by a meaningful percentage. Some venues quote the fee in the base currency and some in the quote currency; both need to end up in the same place before the calculation.
Partial sales
You do not have to sell whole lots. Selling half of a lot leaves half of it, and the basis of what remains must be split proportionally rather than rounded.
This is where hand calculations start drifting. If you sell 0.375 BTC out of a 2 BTC lot, the remaining basis is 0.625 of the original. Carrying full precision matters — rounding each partial sale independently accumulates error that shows up as a total that never quite matches your exchange.
Losses and what carries forward
A loss on one disposal does not simply vanish. Most jurisdictions allow realised losses to offset realised gains, often subject to caps, and many carry an unused loss forward to a subsequent year.
What does not usually carry is a decline in value on tokens you still hold. Until you sell, the loss is unrealised and generally not recognized. This is the difference between a portfolio showing a large paper loss and a taxable position showing none.
Choosing one
Practical considerations, in order of how much they usually matter:
- What your jurisdiction allows. This eliminates most options immediately.
- What your data supports. Specific identification needs lot-level history that some venues do not provide.
- Consistency. Pick one and apply it to every disposal in the period unless the rules say otherwise.
- Tax rates. Short-term and long-term rates differ in some countries, so the holding period attached to each lot can matter as much as the total.
A note on ordering. Because FIFO always leaves the newest, most expensive lots behind, it leaves the lowest remaining basis. That means future disposals under FIFO will realise larger gains than LIFO would. The method does not change what happened — it changes what you are left holding.
One rule that catches people out
In the United States, a loss on the sale of one token generally cannot offset a gain on a substantially identical asset bought within a window around that sale. Instead of being used, the loss is deferred and applied against the replacement position.
This only bites in portfolios that hold materially the same asset twice — which, with token lists being cloned and wrapped, is more common than it was. The effect is a tax bill that does not shrink when a position loses money.
Other jurisdictions handle this differently, and some have no equivalent rule at all. It is worth knowing whether yours applies before assuming a deduction is available.
Next: which records you need