Digital asset identification is the process of specifying which units of a digital asset are treated as sold when a taxpayer holds several lots of the same asset acquired at different times and prices. The lot identified fixes the acquisition date and cost basis that attach to the sale.
Units of the same digital asset are fungible, so a sale of 1 BTC out of 3 BTC held does not say which BTC left. Each purchase created a tax lot with its own date and cost, and the gain on the sale depends on which lot is treated as sold. Identification is the act of choosing, and the rules set both how the choice is made and what happens if it is not made at all.
Under Regulations section 1.1012-1(j) a taxpayer who wants a particular lot treated as sold identifies it no later than the date and time of the sale. For units held at a broker that means telling the broker, either for the individual sale or through a standing order that applies a chosen method to every sale. For units in a self-custody wallet the identification is made in the taxpayer's own records at the time of the sale. Where no identification is made, the units are treated as sold in the order they were acquired, which is FIFO.
Since January 1, 2025 identification operates within each wallet or account rather than across everything the taxpayer holds. The units sold from an exchange account are drawn from the lots in that account, and a lot held in a self-custody wallet cannot be matched against a sale at the exchange. Revenue Procedure 2024-28 provided a safe harbor for allocating the basis of units held on January 1, 2025 to the wallets and accounts where the units then sat, which is the starting position that later identification builds on.
A taxpayer holds three lots of ETH at one exchange: 1 ETH bought at $1,800, 1 ETH at $2,600 and 1 ETH at $3,400. Selling 1 ETH for $3,000 with no identification disposes of the $1,800 lot, a $1,200 gain. Identifying the $3,400 lot to the broker before the sale produces a $400 loss instead. Identifying the $2,600 lot the following week, after the sale has settled, is too late and the FIFO result stands.
The units the taxpayer adequately identified by the time of the sale; otherwise the earliest acquired units in that wallet or account. Specific identification is what allows a method such as HIFO to be used at all, because HIFO is simply a standing instruction to identify the highest-basis lot each time. Without adequate identification the method is FIFO regardless of what the tax software is set to.
For sales at a broker from 2026, the identification also drives what the broker reports. The Form 1099-DA basis for a covered lot is the basis of the lot the broker treated as sold, which is the lot the customer identified or, failing that, the broker's FIFO default. The return has to follow the same lot. A different lot chosen afterwards in software gives a basis the IRS cannot match to the broker's figure and that the taxpayer cannot support with a timely identification.
For sales during 2025, IRS Notice 2025-7 gave temporary relief: a taxpayer could identify the units sold in their own records where the broker did not yet support an identification. From 2026 the identification has to be made with the broker by the time of the sale, or through a standing order the broker applies.
Tax software applies HIFO across the taxpayer's entire holdings for 2025 and 2026, as it did in the years when pooling across wallets was allowed. The exchange, with no instruction, sold the earliest lot from its own account and from 2026 reports that lot's basis. The return claims a high-basis lot that was actually sitting in a hardware wallet and never left it. The software setting is not an identification; the lot the broker sold is the lot that was sold.
Read our 1099-DA accounting and cost basis reconciliation
CountDeFi applies lot identification that ties to your broker forms, including wallet-by-wallet basis, standing orders and the 2025 allocation of pre-existing lots. See pricing.
