HIFO, highest in first out, is an ordering approach that treats the units with the highest cost as sold first. Applied to a sale of part of a holding, it matches the sale against the most expensive tax lots, which produces the smallest gain or the largest loss on that sale.
HIFO sorts the available tax lots of a token by cost per unit rather than by date, and consumes the most expensive lot first. A holder with ETH bought at 1,800, 3,400 and 2,600 dollars who sells one unit under HIFO is treated as selling the 3,400 dollar unit. The lots that remain are the cheaper ones, so HIFO defers gain rather than removing it: the low-cost lots are still there and will produce the larger gain when they are eventually sold.
HIFO takes no account of the holding period. The highest-cost lot is often the most recent one, so a HIFO sale can produce a short-term result where FIFO would have produced a long-term one. The lower gain and the higher rate have to be weighed together.
Crypto tax software usually offers HIFO as a setting. That setting reorders lots in the software; it does not by itself satisfy any identification requirement.
Yes, but only as a form of specific identification, and only where the identification requirements are met. Regulations section 1.1012-1(j) does not name HIFO or offer it as a method. It permits a taxpayer to identify the specific units sold and applies FIFO within the wallet or account when no adequate identification is made. HIFO is the pattern that results when the taxpayer identifies, sale by sale or through a rule set in advance, the highest-basis units in that wallet or account as the ones sold.
For units held with a broker, the identification is made to the broker no later than the sale, either as an instruction for that sale or through a standing order the broker applies. For units in an unhosted wallet, the identification is made in the taxpayer's own books and records no later than the sale, and those records must establish the basis and holding period of the units identified. In each case the identification operates within one wallet or account; the highest-cost lot in the portfolio is irrelevant if it sits somewhere other than where the sale happened.
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, a HIFO ordering that the broker was never told about is not an identification, and the broker's Form 1099-DA will reflect FIFO.
The HIFO setting is switched on in tax software the following spring, after the sales have happened. The software rewrites every 2025 sale against the highest-cost lot, but no identification existed at the time of any sale and the records show none. The regulation treats those sales as FIFO, the return reports basis the taxpayer cannot support, and the broker's reporting shows the FIFO figures.
Read our Universal vs Wallet-Based Cost Tracking
CountDeFi provides done-for-you crypto tax accounting, including lot identification records, broker standing orders and reconciliation of HIFO reports against Form 1099-DA. See pricing.
