Question
Does the IRS recognize the HIFO sell method?
Answer
The Internal Revenue Service does not recognize HIFO (high in, first out) as an accounting method but it generally permits an investor to specifically identify his or her shares at the time stock is sold, for reporting capital gains and losses. Taking advantage of specific identification of shares sold effectively permits an investor to use HIFO by permitting the investor to select the right lot of stock to sell. However, in order to take advantage of specific identification, IRS rules generally require that an investor adequately identify the specific lots of stock that are sold either by delivering the proper lot for sale (in the case of stock held in physical form) or by maintaining adequate records of his or her stock lot purchases and instructing the broker or custodian of the specified lot(s) to be sold at the time of sale and, within a reasonable time after the sale, receiving from the broker or agent written confirmation that the proper lot was sold (in the case of stock held in street name or by a nominee). To simplify things for investors and brokers, the IRS has concluded that a written standing order from a customer to a broker to apply the HIFO method to sales of the investor’s shares where written confirmations were provided to the customer that per instructions, highest cost shares were sold first, satisfied the adequate identification requirement.
It is important to note the steps that an investor (and the investor’s broker or agent) must timely take in order to satisfy the adequate identification requirement. According to the IRS rules, if an investor does not adequately identify the specific shares to sell at the time of sale, all gain and loss calculations generally default to the FIFO (first in, first out) method. That is, the investor is treated for tax purposes as selling the oldest purchased first.
FAQs
Does the IRS recognize the HIFO sell method? The Internal Revenue Service does not recognize HIFO (high in, first out) as an accounting method but it generally permits an investor to specifically identify his or her shares at the time stock is sold, for reporting capital gains and losses.
What is the HIFO method of tax? ›
HIFO: This method disposes of the highest purchase price first in the event of a sale. When you sell, you pick out your most expensive crypto purchase and use that number to determine your taxes. A higher cost basis translates to less tax on your sale.
How does IRS verify cost basis real estate? ›
The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.
Can you use HIFO? ›
According to IRS guidance, you can use a specific identification method like LIFO or HIFO if you have records containing the following information: The date and time each unit was acquired. Your basis and the fair market value of each unit at the time it was acquired.
Is HIFO or FIFO better for crypto taxes? ›
Crypto accounting methods explained
Your chosen method determines the order in which you sell your cryptocurrency, significantly impacting your tax bill. While the First In, First Out (FIFO) method is commonly used, other methods like Highest In, First Out (HIFO) can save you money on taxes.
How does IRS audit HSA? ›
Does HSA spending trigger an audit? The IRS doesn't monitor how you spend your HSA funds throughout the year, but that doesn't mean they won't ask for proof that your expenses were eligible. And if your tax return contains unrelated IRS audit red flags, your risk for an HSA audit could increase.
What is the HIFO rule? ›
Highest in, first out (HIFO) is a method of accounting for a firm's inventories wherein the highest cost items are the first to be taken out of stock. HIFO inventory helps a company decrease their taxable income since it will realize the highest cost of goods sold.
What is an example of the HIFO method? ›
Example: Let's say a business bought 100 shares of stock at $10 each and 100 shares at $20 each. If the business sells 100 shares of stock at $25 each, the cost basis using the HIFO method would be $20 per share. This reduces the amount of taxable income and saves the business money on taxes.
Who uses HIFO? ›
Highest-in First-out is typically used by corporations looking to minimize their taxable earnings for a particular accounting period. HIFO allows for the costliest inventory to be sold first, regardless of when it was purchased, thereby driving up the value of the cost of goods sold and lowering taxable earnings.
What happens if I don't know my cost basis? ›
Contact your brokerage firm
Your broker should have a record of the purchase, if you bought the stock from them. If not, they might still be able and willing to look up the historical stock price for you.
You can use a CMA (by a real estate agent or broker) for FMV, but the IRS considers the best evidence of FMV to be an appraisal by a certified real estate appraiser.
Why isn t cost basis reported to IRS? ›
Traders who sell securities purchased prior to the dates listed above may not see cost basis information included on their 1099-B, or it may be incomplete. This doesn't mean the non-covered cost basis isn't reportable; rather, it's not required to be reported by a broker to the IRS.
What is the HIFO calculation? ›
HIFO (Highest In, First Out) is a method for calculating crypto capital gains that minimizes taxes by selling the highest priced assets first. It offers tax advantages over FIFO (First In, First Out) and LIFO (Last In, First Out) by maximizing the cost basis, especially in volatile markets.
What is the difference between LIFO and HIFO? ›
HIFO is similar to LIFO, but instead of selling the most recently acquired crypto first, you sell the coins with the highest cost basis first. This results in realizing the smallest possible capital gains.
Why does Coinbase use HIFO? ›
Using the highest-in-first-out cost-basis method (HIFO), you sell the crypto first that has the highest cost basis to keep your gains — and your taxes — as low as possible.
Can you use LIFO for tax purposes? ›
Last-in, First-out (LIFO) and First-in, First-out (FIFO) are two methods of inventory accounting used for both financial accounting and tax. purposes.
Does the IRS know about my crypto wallet? ›
Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS.
Which crypto exchanges report to IRS? ›
New Crypto Rules: Exchanges Like Coinbase Must Report Info On Trades To IRS Starting In 2026.
Is USDT taxable? ›
Can USDT be taxed? Like other cryptocurrencies, stablecoins like USDT are subject to ordinary income and capital gains tax.
