FIFO (First In, First Out)

FIFO stands for First In, First Out, and it's the default method most brokerages use for calculating cost basis. Under FIFO, when you sell shares, the oldest lots you own are considered sold first. This is straightforward and consistent, but it has important tax implications.

For assets that have appreciated over time, FIFO typically results in the largest capital gains because your oldest shares usually have the lowest cost basis. However, FIFO also tends to produce more long-term capital gains (held over one year), which are taxed at lower rates than short-term gains.

FIFO is required by the IRS as the default method for securities if you don't specify otherwise. For crypto, the IRS hasn't mandated a specific method, but FIFO is commonly used and accepted. Some investors prefer FIFO for its simplicity and because it naturally prioritizes long-term gains.

The main advantage of FIFO is simplicity — you don't need to identify specific lots. The downside is lack of flexibility. If you have recently purchased shares with a higher cost basis, FIFO forces you to sell the older, cheaper shares first, potentially creating a larger tax bill.

Understanding FIFO is essential for anyone reviewing their tax reports, as the method directly affects your reported gains and losses. Many investors don't realize their brokerage is using FIFO by default until they see unexpected gains on their 1099-B.