FIFO, first in first out, is a rule for deciding which units of an asset are treated as sold when a holder sells fewer than all of them. The earliest acquired units are treated as sold first, so their acquisition date and cost are the ones used to work out the result of the sale.
A holding of one token is rarely a single purchase. A holder might buy 1 ETH in March, 2 ETH in June and 0.5 ETH in September, each at a different price. Each purchase is a separate tax lot with its own date and cost. When 1.5 ETH are later sold, the sale has to be matched to particular lots before the gain or loss and the holding period can be worked out. FIFO matches the sale to the oldest lots first: the March ETH goes, then 0.5 ETH from the June lot, and the rest of the June lot and the September lot stay on the books.
FIFO is mechanical. It needs nothing from the holder except accurate acquisition dates, and it produces the same answer whoever runs it. In crypto records the rule is applied per token and, for 2025 onward, within each wallet or account rather than across everything the holder owns. A record that carries a transfer date instead of the original purchase date orders the lots wrongly even though the rule itself has been applied correctly.
A holder buys 1 BTC for 30,000 dollars in 2023 and 1 BTC for 60,000 dollars in 2024, both in the same exchange account, then sells 1 BTC for 65,000 dollars in 2025 without identifying which unit is sold. Under FIFO the 2023 unit is sold: a 35,000 dollar long-term gain. Had the 2024 unit been adequately identified before the sale, the gain would have been 5,000 dollars, short-term. The units are identical on the exchange; the tax result depends on which lot the records say went out.
Under Regulations section 1.1012-1(j), for digital asset units acquired or disposed of on or after January 1, 2025, units are identified within the wallet or account that holds them. Where the taxpayer makes no adequate identification of the units sold, the units are treated as sold in the order acquired, beginning with the earliest units held in that wallet or account. FIFO is therefore the default that applies by operation of the regulation, not a method the taxpayer selects.
The default runs inside each wallet or account, not across the portfolio. A sale from an exchange account consumes the earliest units in that account even if an older, cheaper lot sits in a hardware wallet. That is the change from the universal pool many holders used before 2025, and it is why wallet-by-wallet cost basis records are needed for FIFO to be applied at all.
FIFO can be displaced only by specific identification made no later than the sale. Once a sale has happened without an identification, FIFO stands for that sale. Brokers apply the same default to units in their custody when the customer has given no instruction, so the taxpayer's FIFO calculation and the broker's should agree where both hold the same acquisition data.
Tax software set to FIFO across all wallets as one pool matches a 2025 exchange sale to a lot held in a cold wallet. The regulation matches it to the earliest lot in the exchange account. Basis, holding period and gain on Form 8949 come out different from the broker's records, and the wallet still holding the lot the software consumed now carries an understated basis into every later sale.
Read our Universal vs Wallet-Based Cost Tracking
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