Two purchases of the same coin, one sale, and a question that decides the gain: which units left? A method name in a dropdown does not settle it.

What settles it is the account the sale ran through and whether a record shows who picked the units and when that pick was made.

Start with the wallet, the sale, and the purchase lots

Hypothetical example: two purchases, one sale. Lot A was acquired earlier at a lower unit cost. Lot B was acquired later at a higher unit cost.

Both sit in the same account, and either one covers the quantity being sold. FIFO reaches for Lot A. A timely specific identification could name Lot B instead, which is the highest-cost choice.

The labels are illustrative only: no prices, dates, or savings are implied.

A tax lot is a discrete unit of acquisition of a fungible asset, meaning a specific purchase of a given quantity at a given time and price, tracked separately for basis and holding period. Since January 1, 2025, IRC § 1012 and Treas. Reg. § 1.1012-1(j) apply that tracking wallet-by-wallet and account-by-account.

The older, cheaper coins in your hardware wallet are therefore not available to a sale executed inside an exchange account; that sale draws only on lots held there.

Identification runs down two regulation paths, § 1.1012-1(j)(2) for units in an unhosted wallet and § 1.1012-1(j)(3)(ii) for units in a broker's custody, with the defaults at § 1.1012-1(j)(1) and § 1.1012-1(j)(3)(i).

If you allocated unused pre-2025 basis across wallets and accounts under the Rev. Proc.

2024-28 transition safe harbor as of January 1, 2025, check the earlier wallet allocation first, because that allocation set starting balances rather than choosing lots for a sale.

One boundary sentence while we are here: a blank basis box on a broker's form does not establish that the units cost zero (Instructions for Form 1099-DA).

Who chose the lot, and where is that choice recorded?

Three different things get called "my method" in reader questions, and only one of them is a choice the reader made.

Start with the exchange setting. Under § 1.1012-1(j)(3)(ii), a holder of units in a broker's custody can specify the units to the broker, or rely on a standing order the broker recognizes. There is one automatic case: where the broker offers only a single specific-identification method, that method is treated as a standing order.

Absent adequate identification, § 1.1012-1(j)(3)(i) sends that broker account to FIFO. So the practical question for a sell-page preference is whether the broker treats it as a recognized standing order and whether it leaves a confirmation you can retrieve later.

A toggle in tax software is a different animal. It runs at return-preparation time, on imported data, months after the disposition, and it changes how a report is computed rather than which units were designated when the sale happened. The lot ordering a broker prints on its own statement is also its own thing: it tells you what the broker reported.

HIFO is none of these as a legal route. It is a rule for picking which lots to name once identification is actually available to you.

Route or strategy Who chooses the units When the choice must exist Documentation needed What the broker's report establishes Gain-comparison tendency
Default FIFO, § 1.1012-1(j)(1) or (j)(3)(i) Nobody chooses; the rule assigns the earliest acquired units in that wallet or account Applies whenever adequate identification is missing at the disposition Acquisition records for the earliest lots in that wallet or account That FIFO output matches the default; it is not evidence you elected anything Earliest acquisitions in the account, often the lower-cost ones
Identification given to the broker, or a broker-recognized standing order, § 1.1012-1(j)(3)(ii) The taxpayer, through the broker's own mechanism At or before the disposition; a standing order must already be in place. Where the broker offers only one specific-identification method, that method counts as a standing order The broker's confirmation of the specified units or the standing-order setting, plus each lot's acquisition date and cost The units the broker acted on and reported Depends on which lots are named.
↳ HIFO: naming the highest-cost lots available. A strategy inside this route, not a fourth route.
Taxpayer's own books and records, 2025-2026 relief (Notice 2025-7; Notice 2026-20) The taxpayer, in their own records, for broker-custodied assets At or before the disposition, for dispositions from January 1, 2025 through December 31, 2026 A contemporaneous record tying account, asset, quantity, acquisition lot, and the sale Nothing about your identification; broker reporting continues under § 1.6045-1 Depends on the lots identified.
↳ HIFO fits here too when the record names the highest-cost lots.

Decision tree: can this sale use the lot you selected?

  1. Name the wallet or account the sale executed in, and the sale date.
  2. List the acquisition lots actually held there on that date. Lots with no purchase evidence are not selectable yet: rebuild the acquisition record first.
  3. Ask whether a lot designation or an applicable standing order already existed at or before that sale.
    • Yes, broker custody, made through the broker: broker route, keep the confirmation.
    • Yes, in your own books, disposition inside the 2025-2026 window: taxpayer-books route.
    • Yes, unhosted wallet: your own contemporaneous record governs.
    • No: the FIFO default for that wallet or account applies.
  4. Sale already done? Retrieve the record as it stood then. A better-looking lot chosen now is a new preference, not the identification.
  5. Compare the broker's reported lots against your record separately. A mismatch is a reporting difference to reconcile.

Record specific identification at or before the sale

Specific identification means the holder designates, at or before the time of the sale, which specific lots are being sold, instead of accepting a chronological default. The timing half is the part that gets lost: a specific-lot election is generally expected to be made at or before the disposal, not reconstructed afterward while preparing a return.

What makes the designation retrievable in October is a record with the same fields every time.

Keep the wallet or account identifier, the asset, the quantity disposed of, the acquisition lot you named with its date, quantity and cost, the sale it applies to, and when and how you made the designation.

That is a working organizer for reconciliation, not a legal checklist, and filling it in does not by itself settle whether an identification was adequate.

Can I change the choice after selling?

You can examine the choice you already made; you cannot manufacture a new one. Consider the pattern where a seller opens their tax program in March, switches the method setting, watches the reported gain drop, and treats that as their election for a sale that closed in July. The setting changed the computation.

Nothing changed about which units were designated at the disposition, because nothing was designated. If a timely record exists in the broker's confirmation or in your own books, report what it supports. If none exists, the applicable default governs that sale.

HIFO describes the lots selected

Back to Lot A and Lot B. FIFO takes Lot A because it was acquired first in that account. Highest-cost selection takes Lot B, and the gain on the same sale is computed against Lot B's larger basis.

That is the mechanical difference in full: a different assigned basis in one illustrative sale, not a lower bill in every situation, and not a pass on the identification requirements.

Highest-cost-first and most-recent-first are commonly implemented as an exercise of specific identification, choosing which lots to name, rather than as freestanding accounting conventions. Most-recent-first just applies a different ordering rule to the same list of available lots.

Which is why the HIFO switch in a tax program is the easy half of the work. Professional analysis of cost-basis methods frames HIFO and LIFO as specific-identification strategies that require contemporaneous documentation (Camuso CPA). The setting computes.

The record identifies.

Myth versus fact: a setting is only part of the record.

Myth Fact
"HIFO is a separate IRS-approved method for crypto." It is a selection strategy carried out through specific identification, and the identification requirements still apply to it.
"The HIFO toggle in my software is my election." Selecting a software setting alone does not satisfy the supporting-record requirement; a designation made at or before the disposal does.
"My broker reported FIFO, so FIFO is what I have." Broker reporting sits separately from your own identification, and a separately supported selection can differ from the reported lots.
"I'll decide at filing which lots look best." A preference expressed during return preparation is not a choice recorded at or before the disposal. A broker-recognized standing order in place before the sale does count.

Keep the 2025-2026 relief separate from broker reporting

For broker-custodied digital assets, Notice 2025-7 permits a timely specific-lot identification or a standing order kept in the taxpayer's own books and records for dispositions from January 1, 2025 through December 31, 2026, and a Notice 2026-20 extension ends this temporary relief on December 31, 2026 (current figure at the IRS).

Without adequate identification, FIFO applies. Plan around the end date as written.

Two things the relief leaves untouched.

It does not change what the broker reports: broker reporting runs under § 1.6045-1, so the basis or acquisition dates a broker shows for a 2026 sale can differ from the units you identified in your own records.

That gap is reconciliation work, not a signal that one side made an error.

It is also not the January 1, 2025 basis-allocation safe harbor in Rev. Proc. 2024-28.

The safe harbor allocated unused pre-2025 basis across wallets and accounts, once. It does not pick lots for a particular sale, and an allocation schedule is not a substitute for a designation on a specific disposition.

The relief moves where the record can live. It does not move when the record has to be made.

If you move part of your coins, preserve the lot connection

A partial transfer out of an exchange into a wallet you control moves units. It does not move basis facts along with them. The receiving side sees a quantity, a timestamp, an address, and nothing in that deposit says which earlier purchase those units came from or what they cost.

The deposit date is not an acquisition date.

The error pattern worth naming: months later the seller disposes of coins from the receiving wallet, the software assigns the deposit date and a missing or estimated cost, and the sale gets reported against a lot nobody ever identified.

What prevents it is a record written at the time of the transfer, linking the quantity moved to the specific acquisition lots it came from, carrying each lot's original acquisition date and cost across.

Where the sending side's history is interrupted, that connection has to come from the sending account's own records before the receiving wallet's lots mean anything at all. For the full workflow, preserve the chosen lot when you move coins.

Choose from the lots your records support

Before the next sale: name the account, list the lots actually available inside it, then check whether a timely designation or an applicable standing order already exists. Compare what those supported lots produce, and record the designation before the order goes in. Where a lot has no acquisition evidence, rebuilding that purchase record comes ahead of any method comparison.

For a sale already made, the job is retrieval rather than selection. Find the record as it stood at the disposition, in the broker's confirmation or in your own books, and report what it supports. A messy custody break or a disputed disposition is worth an hour with a qualified tax professional.

Once the account, purchase records, and timing are documented, compare documented lot choices in the cost basis method calculator. For the neighboring broker-form questions, see the full 1099-DA guide index.

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