HIFO (Highest In, First Out)
Tax optimization strategy where you sell the highest-cost assets first to minimize capital gains.
What You Need to Know
HIFO (Highest In, First Out) is an accounting method where you sell the assets with the highest cost basis first, minimizing taxable gains (or maximizing losses for tax-loss harvesting).
How It Works: If you bought:
- 1 BTC for $10,000
- 1 BTC for $40,000
- 1 BTC for $60,000
When you sell 1 BTC for $70,000:
- FIFO: Gain = $70,000 - $10,000 = $60,000 (highest tax)
- HIFO: Gain = $70,000 - $60,000 = $10,000 (lowest tax)
Pros:
- Minimizes taxable gains (or maximizes deductible losses)
- Great for tax-loss harvesting
- Completely legal and IRS-approved
Cons:
- Requires meticulous recordkeeping to prove which coins you sold
- More complex than FIFO
- May not maximize long-term gains treatment
When to Use:
- You want to minimize taxes in the current year
- You're tax-loss harvesting
- You have detailed transaction records and can prove which specific coins you sold
Important: You must be able to specifically identify the coins sold at the time of the transaction (not retroactively during tax season).
Sources & References
This information is sourced from authoritative government and academic institutions:
- irs.gov
https://www.irs.gov/pub/irs-pdf/p550.pdf
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Related Terms in Tax Planning
Capital Gains
Profits realized from selling investments like stocks, bonds, or real estate for more than their cost basis.
Cost Basis (Crypto)
The original purchase price of cryptocurrency plus fees, used to calculate capital gains or losses.
FBAR (Foreign Bank Account Report)
FinCEN Form 114 requiring U.S. persons to report foreign financial accounts exceeding $10,000 aggregate value.
FIFO (First In, First Out)
Accounting method where the oldest assets are sold first—the IRS default for cryptocurrency.
Form 8949
IRS form used to report sales and dispositions of capital assets, including cryptocurrency.
Tax Credit
A dollar-for-dollar reduction in tax liability, providing direct savings on taxes owed.