Introducing HIFO: Maximize Tax Efficiency with Smart Cost Basis Selection

Tax season shouldn’t mean leaving money on the table. Today we’re introducing HIFO (Highest In, First Out)—a powerful costing method that automatically minimizes your capital gains.

The Challenge: Suboptimal Tax Outcomes

Most crypto organizations use FIFO (First In, First Out) because it’s simple and widely accepted. But FIFO often results in higher taxes:

FIFO Example:

Jan: Buy 1 BTC @ $30,000
Mar: Buy 1 BTC @ $45,000
Jun: Sell 1 BTC @ $50,000

FIFO uses the $30,000 lot → $20,000 taxable gain

With volatile crypto prices, your oldest purchases often have the lowest cost basis—creating larger gains and higher tax bills.

How HIFO Works

HIFO automatically selects the lots with the highest purchase price first. This minimizes your realized gains (or maximizes your losses for tax harvesting).

Same scenario with HIFO:

Jan: Buy 1 BTC @ $30,000
Mar: Buy 1 BTC @ $45,000
Jun: Sell 1 BTC @ $50,000

HIFO uses the $45,000 lot → $5,000 taxable gain

Result: 75% lower capital gains with zero manual work.

Real-World Impact

HIFO provides the tax optimization benefits of Specific Identification (manually picking lots) without the overhead:

Method	Manual Work	Tax Optimization	Audit Defense
FIFO	None	❌ Low	✅ Strong
Specific ID	High per transaction	✅ Maximum	⚠️ Requires docs
HIFO	None	✅ High	✅ Strong

Key Benefits

1. Automated Tax Optimization

No need to manually select lots for every disposal. HIFO applies the optimal strategy automatically across all transactions.

2. Significant Tax Savings

In rising markets (most crypto portfolios), HIFO can reduce capital gains by 40-70% compared to FIFO.

3. Strategic Loss Harvesting

When prices fall below your highest purchases, HIFO automatically realizes losses you can use to offset other gains.

4. Audit Trail & Compliance

HIFO is mathematically deterministic—the highest cost lot is always selected. This provides a clear, defensible audit trail.

5. Works with Tax Lot Tracking

HIFO integrates seamlessly with our tax lot system, automatically tracking basis, holding periods, and disposal matching.

Use Cases

Crypto Funds

Minimize capital gains distributions to investors while maintaining full compliance.

Treasury Operations

Optimize tax outcomes when selling holdings for operational expenses or rebalancing.

DeFi Protocols

Handle complex yield farming and liquidity provision with tax-efficient disposal strategies.

Corporate Treasuries

Reduce tax liability on digital asset sales while maintaining clear accounting records.

Getting Started

HIFO is available now in all Coincile plans:

1. Navigate to Organization Settings → Accounting Preferences
2. Select “Cost Basis HIFO” from the Calculation Mode dropdown
3. Save changes → HIFO applies to all future disposals

Existing organizations can switch methods at any time. Historical transactions remain unchanged—only new disposals use the new method.

Method Comparison Tool

Not sure which method is right for you? Use our disposal preview feature to compare outcomes:

Preview: Selling 2.5 BTC at $48,000

FIFO Result:  $32,000 gain (Short-term: $28k, Long-term: $4k)
LIFO Result:  $18,000 gain (Short-term: $18k, Long-term: $0)
HIFO Result:  $12,000 gain (Short-term: $12k, Long-term: $0)

Recommended: HIFO (saves ~$8,000 in taxes at 40% rate)

Technical Details

HIFO selection algorithm:

• Orders available tax lots by unit cost (descending)
• Consumes highest-cost lots first until disposal quantity is met
• Respects per-wallet accounting (IRS Rev. Proc. 2024-28 compliant)
• Tracks short-term vs long-term holding periods automatically

Supported Costing Methods

Coincile now supports six costing methods to fit any accounting requirement:

• ✅ FIFO - First In, First Out (default, widely accepted)
• ✅ LIFO - Last In, First Out (useful for certain strategies)
• ✅ HIFO - Highest In, First Out (NEW - tax optimization)
• ✅ WAC - Weighted Average Cost (period-based pooling)
• ✅ WAC Perpetual (Tranched) - Transaction-level averaging
• ✅ WAC Perpetual - Continuous weighted average

Each method is fully integrated with our tax lot system, disposal tracking, and gain/loss reporting.

Important Considerations

Jurisdiction Compliance: While HIFO is accepted in many jurisdictions when properly documented, tax rules vary. Always consult with a tax professional before implementing a new costing method.

Consistency: Once selected, maintain the same method for the tax year unless you have specific guidance from your accountant.

Documentation: Coincile automatically maintains complete records of all lot selections, ensuring full audit trail compliance.

Learn More

• Tax Lot Documentation - How our lot tracking works

---

Questions about HIFO or which costing method is right for you? Contact our team or book a demo to discuss your specific situation.