How are crypto taxes from crypto capital gains going to be different?
If you’re a seasoned stock investor, you probably know all about capital gains and how Uncle Sam takes his cut. But when it comes to cryptocurrency, the game changes—and in your favor. Unlike the stock market, where your broker decides how gains are calculated, crypto lets you choose your accounting method. And that choice can mean the difference between a hefty tax bill and keeping more of your hard-earned gains.
So, how do you pick the right method? Let’s dive into the different strategies and see how they stack up against the way stocks are taxed.
FIFO: The Default Crypto Accounting Method—And Why It’s Not Always the Best
FIFO (First In, First Out) is the “set it and forget it” method of the crypto world. It’s what you get by default if you don’t choose another method. Think of it like selling your first share of Apple stock from 2005—FIFO makes you sell your oldest crypto first.
While this is easy to use and always IRS-approved, FIFO isn’t always your friend. In a rising market, selling your oldest crypto means you’re often selling the asset with the lowest cost basis. That translates into a higher taxable gain. If you bought one Bitcoin at $15,000 a year ago and another at $40,000 six months ago, and you sell one today at $60,000, FIFO says you sold the $15,000 Bitcoin first. Your taxable gain? A whopping $45,000.
Contrast that with stocks: your broker usually follows FIFO for tax reporting, but you don’t have much choice. With crypto, however, you’re not stuck with FIFO unless you want to be.
HIFO and LIFO: Creative Accounting for Crypto Gains
What if you could turn that tax equation on its head? With crypto, you can. Enter HIFO (Highest In, First Out) and LIFO (Last In, First Out)—methods that aren’t typically available for stocks but are game-changers for crypto taxes.
HIFO (Highest In, First Out): This method lets you sell the highest-cost crypto first. In our example, if you sell the Bitcoin purchased at $40,000, your gain drops to just $20,000, reducing your tax liability significantly. It’s like selling your most expensive shares first. The catch? You could lose the long-term capital gains treatment, which might bump you into a higher tax bracket.
LIFO (Last In, First Out): Think of this as the opposite of FIFO. You sell your most recently purchased crypto first. In our scenario, if you acquired Bitcoin for $35,000 just before the sale, LIFO says that’s the one you sold. Your gain is now $25,000—not great, but not as bad as FIFO’s $45,000 hit. It’s a useful method if you want to reduce your gains in a rising market, but it requires a lot of record-keeping to prove your cost basis to the IRS.
Record Keeping: Where Crypto and Stocks Really Differ
Stocks are easy—your broker sends you a 1099-B, and you’re good to go. Not so with crypto and crypto taxes. Choosing HIFO or LIFO means you’re in charge of meticulous record-keeping. You need to track:
- The date and time each crypto unit was acquired
- The basis (cost) and fair market value of each unit at the time of purchase
- The date and time each unit was sold or disposed of
- The fair market value at the time of sale
If your records aren’t spot-on, the IRS will default you back to FIFO, which could mean more taxes for you. Specialized crypto tax software can help automate this process, but you’re still on the hook to export and maintain your transaction histories from all exchanges or wallets.
Why Now is the Time to Act: IRS Changes Are Coming
Stocks and bonds have their tax rules down pat, but the IRS is still figuring out what to do with crypto. New proposed regulations could make it tougher to use specific identification methods like HIFO and LIFO starting in 2025. If these changes take effect, you may have to identify each unit of crypto sold at the time of sale—something that most exchanges don’t currently support.
Plus, new reporting requirements starting in 2026 mean digital brokers must file a new IRS Form 1099-DA, detailing the basis, purchase date, and type of gain or loss for each crypto sale. Unlike stocks, where this kind of reporting is standard, crypto brokers haven’t had to do this yet. So, expect more changes that could impact your tax strategy.
The Bottom Line: Stay in Control of Your Crypto Taxes
Unlike stocks, where you’re stuck with whatever your broker reports, crypto puts the power back in your hands. You can change your accounting method from year to year without needing IRS approval or disclosing it on your tax return. By choosing the right strategy—whether that’s sticking with FIFO or switching to HIFO or LIFO—you can keep more of your profits.
So, why leave your crypto gains to chance? Reach out to us at Quartermaster for a free consultation, and let’s craft a tax strategy that works for you. Don’t let Uncle Sam grab more than his fair share!