FIFO (First In, First Out)

FIFO—First In, First Out—is the most common way brokerages calculate your cost basis. When you sell some of your shares, FIFO assumes you're selling the ones you bought first. It's straightforward, but it has real tax implications worth understanding.

If your investments have gone up over time, FIFO usually means bigger gains because your oldest shares have the lowest cost basis. The upside? Those older shares are more likely to qualify as long-term gains, which are taxed at lower rates (0%, 15%, or 20% instead of your ordinary income rate).

The IRS treats FIFO as the default for securities if you don't pick a different method. For crypto, there's no mandated method, but FIFO is widely used and accepted. A lot of investors stick with FIFO because it's simple and naturally favors the lower long-term tax rates.

The trade-off is flexibility. If you recently bought shares at a higher price, FIFO forces you to sell the older, cheaper shares first—potentially creating a larger taxable gain than you'd like. That's where methods like specific identification can help, though they require more record-keeping.

Here's a common surprise: many investors don't realize their brokerage is using FIFO by default until they see unexpectedly large gains on their 1099-B. It's worth checking which method your broker uses before tax season catches you off guard.