Adequate identification is the standard a designation of which units were sold has to meet before it is recognised. The identification must point to specific units in the wallet or account the sale came from, be made no later than the sale, and be supported by records that establish the acquisition date and cost of those units.
Specific identification is a choice; adequate identification is the test the choice has to pass. Three things have to be true. The identification has to name particular units, by a reference that distinguishes them from the other units in the same wallet or account, such as the date and price they were bought at. It has to exist no later than the sale, not be reconstructed afterwards. And it has to be backed by records that establish the cost basis and holding period of the units named.
Where the units are held with a broker, the identification is a communication to the broker: an instruction for that sale, or a standing order the broker applies to every sale. Where the units are in an unhosted wallet, there is no one to instruct, and the identification is an entry in the holder's own books and records: a note, made before or at the sale, of which tax lots the sale consumes, alongside the acquisition data for those lots.
Records that would support an identification include the exchange trade confirmation with date, quantity and price, the on-chain record of a purchase or swap, and the ledger entry made at the time of sale that ties the sale to those acquisitions.
Under Regulations section 1.1012-1(j), for digital asset units acquired or disposed of on or after January 1, 2025, a taxpayer who wants a sale matched to particular units must make an adequate identification; where none is made, the units are treated as sold FIFO within the wallet or account. For units held with a broker, the identification is adequate if made to the broker no later than the sale, or through a standing order that the broker applies. For units in an unhosted wallet, it is adequate if made in the taxpayer's own books and records no later than the sale. In both cases the records must be sufficient to establish the basis and holding period of the identified units, and the units must be ones held in the wallet or account the sale came from.
For 2025, IRS Notice 2025-7 provided relief that let taxpayers rely on their own records to identify units held with a broker where the broker did not support per-sale identification or standing orders. That relief is for 2025. Outside it, an identification for broker-held units that the broker never received is not adequate, and the broker's Form 1099-DA will show FIFO lots.
An identification that is not adequate is not partially effective. The sale falls to FIFO, and the lots the taxpayer meant to sell remain on the books.
A holder's record for a 2025 sale reads: the coins bought in 2021. The wallet held four lots bought in 2021 at prices between 9,000 and 58,000 dollars. The identification does not distinguish among them, so it is not adequate, and the sale is matched FIFO to the earliest 2021 lot rather than to the 58,000 dollar lot the holder had in mind.
Read our Universal vs Wallet-Based Cost Tracking
CountDeFi provides done-for-you crypto tax accounting, including contemporaneous lot identification records, broker standing orders and substantiation of basis and holding period for identified units. See pricing.
