Lesson 2 — Cost-basis methods: FIFO, HIFO, specific ID, and Section 104

**FIFO — First-In, First-Out.** The default in many jurisdictions: the units you sell are assumed to be the units you bought first. In rising markets, this typically produces the highest reported gains, because the earliest (cheapest) units are matched against current (high) prices. In falling markets, the opposite. FIFO is straightforward to track and is the default rule in the US (post-2025 1099-DA finalisation), UK Section 104 pooling, and most European jurisdictions. Its main drawback is that it's tax-inefficient in bull markets.

**LIFO — Last-In, First-Out.** Assumes the most recently acquired units are the first sold. In rising markets, LIFO often produces lower gains than FIFO because recent (expensive) basis matches current prices. LIFO is permitted in some jurisdictions for some assets but is **generally not permitted for crypto** in the US under the 2025 1099-DA finalisation and in many other jurisdictions. Where it's not permitted, attempting to use it can result in penalties.

**HIFO — Highest-In, First-Out.** Assumes the most expensively acquired units are the first sold. HIFO is typically the lowest-tax method in rising markets (highest basis = lowest gain). HIFO is generally only available under 'specific identification' rules — meaning you must have tracked which exact tokens you sold and have the records to demonstrate it. This is essentially impossible without dedicated tax software because manual specific-ID across many DeFi transactions is extraordinarily tedious. Where HIFO is permitted and you have the tracking discipline, it materially reduces tax bills in bull markets.

**Specific Identification.** Rather than applying a blanket rule, you (the taxpayer) choose which specific units you sold. This is the most flexible method but requires meticulous record-keeping: you must be able to demonstrate, at audit, that you tracked the specific lot disposed. Specific ID is the umbrella under which HIFO is typically implemented. The IRS post-2025 1099-DA finalisation requires per-wallet specific identification (you can't pool across wallets and pick freely). Most tax software supports this.

**Average Cost.** All units of the same asset are pooled, and disposals use the running average cost. This is the rule for some assets in Canada, the Netherlands, and certain other jurisdictions. It's the simplest to compute, eliminates the need to track individual lots, but provides no optimisation flexibility. The UK's Section 104 pool is a variant of this for cryptoassets — see below.

**Section 104 (UK).** The UK uses pooled cost basis: all units of the same cryptoasset are aggregated into a 'Section 104 pool' with a single running average cost. Disposals match against the pool average. Two special rules apply: the 'same-day rule' (disposals on the day of an acquisition are matched against that day's acquisitions first) and the '30-day rule' / 'bed-and-breakfasting rule' (disposals within 30 days of a future acquisition are matched against that future acquisition rather than the pool). The pool simplifies tracking but eliminates US-style optimisation. The HMRC Cryptoassets Manual is the canonical reference.

**The cross-jurisdictional gotcha.** If you owe tax in more than one jurisdiction (e.g., US person living in the UK, or a UK resident with US-source crypto income), the two jurisdictions may require different methods on the same transactions. Reconciling them is genuinely complex and almost always requires a tax professional with cross-border expertise. The general principle: each jurisdiction's rules apply to that jurisdiction's tax filing; treaty relief addresses double taxation but doesn't unify the underlying calculations.

**Practical method choice.** For US individual filers post-2025 with the per-wallet specific-ID rule, HIFO via specific identification (implemented by tax software) is typically the lowest-tax method and is permitted. For UK individuals, Section 104 pooling is the rule — there's no method choice, but the pool naturally averages costs which can be advantageous in volatile markets. For EU residents, check your specific country's rule (Germany requires FIFO with a 1-year holding exemption for long-term tax-free disposal; France uses an aggregate-portfolio method; the Netherlands has a wealth-tax model). The takeaway: the choice is largely *made for you* by your jurisdiction, but understanding which method you're under lets you plan around it.