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LESSONS

Gains, holding periods and lot methods

Gain is proceeds minus basis; the rate depends on holding period. Which coins you sold is a choice between FIFO and specific identification, and it changes the number.

7 MIN READ
COURSE · Taxes and estate planning (US)STAGE 5 · MASTERLESSON 2 OF 7
Two panels comparing FIFO with specific identification methods.
LEVEL · Advanced
IN THIS LESSON · 2 OF 7
BY THE END YOU WILL BE ABLE TO ANSWER
  • What determines long-term versus short-term treatment?
  • Which lot method is the default if you specify nothing?
  • Using the example above, you instead sell 1 BTC for $75,000. What is the gain under HIFO, in dollars? (Highest-basis lot first.)

Then prove it: a 2-question quiz · a challenge. The lesson marks itself complete at 100%.

The arithmetic

Gain or loss = proceeds − cost basis. Basis is what you paid including fees. Proceeds are what you received, in dollars, at the time.

Holding period

  • Short-term: held one year or less. Taxed as ordinary income, 10 to 37% federal in 2025, plus state.
  • Long-term: held more than one year. Taxed at 0, 15 or 20% federal depending on income, plus the 3.8% net investment income tax for higher earners, plus state.

The difference between day 365 and day 366 can be large. Many holders track lots specifically to sell the long-term ones.

Lot methods

You hold bitcoin bought at many prices. When you sell part, which part did you sell?

  • FIFO (first in, first out): the oldest lot. The default if you do nothing. From 2026, brokers report FIFO unless you tell them otherwise.
  • Specific identification: you choose the lot, which lets you use HIFO (highest cost first, minimising gain) or LIFO (newest first). The IRS allows it if you identify the units at the time of sale and keep records, and since 2025 this must be done wallet-by-wallet, not across all your holdings as one pool.
  • Average cost is not available for bitcoin in the US.

Worked example

You bought 1 BTC at $30,000 (2022), 1 at $60,000 (2024) and 1 at $90,000 (2025). You sell 1 BTC in 2026 for $100,000.

  • FIFO: gain $70,000, long-term.
  • HIFO: gain $10,000, short-term if the $90,000 lot is under a year old.

Both are correct. HIFO defers tax; FIFO may get the lower long-term rate. The right answer depends on your bracket and plans.

MINI CHALLENGEPick the lot

Using the example above, you instead sell 1 BTC for $75,000. What is the gain under HIFO, in dollars? (Highest-basis lot first.)

dollars
CHECK YOURSELF
1/2 What determines long-term versus short-term treatment?
2/2 Which lot method is the default if you specify nothing?
pick an answer for each question

SOURCES

  1. Understanding bitcoin taxes (River, 2026 guide)
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