FIFO (First In, First Out)
An accounting method that assumes the oldest assets are sold first when calculating capital gains. FIFO is the default method used by most tax authorities for crypto transactions.
FIFO assumes you sell your oldest coins first. Buy 1 ETH in January, another in July, then sell 1 ETH in December — FIFO says you sold the January one. That distinction determines your cost basis, which determines your taxable gain.
For crypto lenders and borrowers, this isn't an abstract accounting choice. When a platform liquidates collateral or you repay a loan by selling assets, the IRS and most tax authorities treat that as a disposal — and FIFO decides which lot you disposed of.
How It Works
Say you bought 2 ETH: one at $1,000 in 2021 and one at $3,000 in 2022. You later sell 1 ETH at $3,500. Under FIFO, you sold the $1,000 lot — a $2,500 gain. Under LIFO or specific identification, you'd have sold the $3,000 lot — only a $500 gain. Same sale, very different tax bill.
FIFO is the default in the U.S. and most other jurisdictions unless you affirmatively elect a different method and your broker or platform supports it. Many crypto platforms apply FIFO automatically, whether you realize it or not.
The method applies lot by lot, not coin by coin. Each purchase is a separate lot with its own cost basis and acquisition date. Holding period matters too — lots held over a year qualify for long-term capital gains rates, which are lower than short-term rates.
Why It Matters
In a rising market, FIFO typically produces the largest taxable gains because your oldest lots usually have the lowest cost basis. That's not a bug in the rule — it's just math. But it means your tax liability can be significantly higher than if you'd used specific identification.
What is Capital Gains?
Profit from selling an asset for more than its purchase price. In crypto lending, capital gains can be triggered by liquidation events, collateral swaps, or converting earned interest.
Full glossary entryThis gets sharp in crypto lending. Collateral liquidations, loan repayments funded by asset sales, and even some yield distributions can all trigger disposals. Each one is a potential taxable event, and FIFO determines the basis on every single one.
Bill's Take
In 25 years of mortgage lending, cost basis was a homeowner's problem at sale — one transaction, one calculation. In crypto lending, you can trigger dozens of taxable disposals in a year without ever intending to sell anything. A liquidation isn't a choice, but the IRS still treats it as a sale. FIFO on a forced liquidation of your cheapest lot is a painful surprise if you weren't expecting it.
What to Watch
Specific identification — where you tell your platform exactly which lot to sell — can reduce your tax bill, but it requires meticulous records and must be elected before the sale, not after. Most platforms don't support it. If yours doesn't, FIFO is what you're getting, whether you chose it or not.
What is Taxable Event?
An action that triggers a tax obligation. In crypto lending, taxable events include earning interest (taxed as income), liquidation of collateral (capital gains), and converting between assets.
Full glossary entryLiquidation + FIFO = Surprise Tax Bill
Collateral liquidations are taxable events in most jurisdictions, even though you didn't choose to sell. If your oldest, lowest-basis ETH gets liquidated to cover a margin call, FIFO just handed you a large capital gain — and a tax bill — on an event you were trying to avoid in the first place.
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