Bitcoin Cost Basis Tracking in 2025 and Beyond

_{Disclaimer: This article is for general educational and informational purposes only and does not constitute tax, legal, or accounting advice. The application of tax rules to Bitcoin and other digital assets depends on each taxpayer’s specific facts and circumstances. Cost basis methods, reporting obligations, and documentation requirements can vary based on activity, custody, and transaction history. Readers should not rely on this information as a substitute for personalized advice from a qualified tax professional. Always consult your own advisor before making tax or reporting decisions.}

What FIFO and Specific Identification Really Mean

As bitcoin tax reporting becomes more standardized, cost basis tracking is moving from an afterthought to a first-order issue. Many bitcoin holders are discovering that the method they use to track cost basis can materially change their tax outcome and their audit risk.

For most people, there are only two cost basis paths that matter going into year-end 2025: FIFO by default, or Specific Identification if done correctly. Understanding the difference, and knowing when each one makes sense, is key to avoiding surprises when you file.

What cost basis actually is

Cost basis is simply what you paid for your bitcoin, including fees. When you later sell or spend bitcoin, your taxable gain or loss is the difference between what you received and the cost basis of the bitcoin you disposed of.

If you bought 1 BTC for $20,000 and later sell it for $90,000, you have a $70,000 capital gain. If you bought at $120,000 and sell at $100,000, you have a $20,000 loss.

The complication arises when you have multiple purchases at different prices and then sell only part of your holdings; different cost basis methods come into play when calculating your bitcoin taxes.

FIFO, the default method

FIFO stands for First In, First Out.

Under FIFO, the first bitcoin you acquired is assumed to be the first bitcoin you sold.

FIFO has always been the default cost basis method for bitcoin when a taxpayer does not adequately identify which units were sold at the time of disposition. This is not a new rule for 2025. What is changing is that broker/exchange reporting and IRS matching will increasingly assume FIFO unless you can clearly prove otherwise.

Here is a simple FIFO example.
You buy:

• 0.5 BTC at $15,000
• 0.5 BTC at $30,000

Later, you sell 0.5 BTC at $40,000.

Under FIFO, the IRS assumes you sold the first 0.5 BTC you bought. Your cost basis is $15,000 and your taxable gain is $25,000.

FIFO is simple. It requires minimal documentation beyond your transaction history. For many long-term holders, FIFO may also be reasonable because earlier purchases often have lower cost basis and may qualify for long-term capital gains, though this is not always the case.

When FIFO tends to make sense:

• You have simple buying and selling activity
• You are a long-term holder
• You do not want to manage complex records
• You are primarily using exchanges that will report FIFO anyway

Specific Identification, the alternative

Specific Identification allows you to choose exactly which bitcoin units you are selling, as long as you can prove it.

Using the same example as above, if you specifically identify that you sold the 0.5 BTC purchased at $30,000, your taxable gain would be only $10,000 instead of $25,000.

Specific Identification is legal and allowed, but it comes with a higher documentation burden. You cannot simply say you used it. You have to show it. Identification must be made contemporaneously with the sale or disposition and must be supported by records that can be substantiated on audit.

What Specific Identification requires

To properly use Specific Identification, you need records that tie a specific acquisition to a specific disposal. In practice, that means:

• Date and time each bitcoin unit was acquired
• Cost basis of each unit, including fees
• Wallet address or exchange account holding those units
• Transaction ID or internal record showing which units were sold
• Consistent application of the method

If you cannot trace the units sold back to a specific acquisition, the IRS will default you back to FIFO.

This is why many people who thought they were using HIFO or LIFO in prior years may find that those methods are no longer defensible. HIFO and LIFO were never separate IRS-approved cost basis methods under the tax code. In practice, they only functioned, if at all, as naming conventions layered on top of Specific Identification under existing Treasury regulations.

When Specific Identification tends to make sense:

• You actively manage taxable gains and losses
• You want flexibility in timing gains
• You have high-volume activity
• You use self-custody wallets with good recordkeeping
• You are willing to maintain clean documentation

How to document cost basis properly

Good documentation is the difference between a method being valid or ignored.

Best practices include:

• Avoid mixing personal and business bitcoin
• Use separate wallets or accounts when possible
• Keep original exchange CSVs and wallet exports
• Track transaction IDs for transfers and sales
• Use consistent valuation sources
• Avoid changing methods opportunistically year to year

One of the biggest risks heading into 2026 is mismatches between what taxpayers report and what brokers report as digital asset reporting requirements are phased in across 2025 and 2026. If your records are sloppy, the IRS will default to FIFO using broker/exchange data.

What changes going forward

The cost basis rules themselves are not changing. FIFO is not “starting” in 2026. It has always been the fallback.

What is changing is enforcement and visibility.

As reporting improves:

• FIFO becomes the practical default for most taxpayers
• Specific Identification remains available but harder to support
• Poor records create audit risk
• Reconstructing history after the fact becomes more difficult

2025 is effectively the last relatively low-friction clean-up year. If your records are incomplete, now is the time to fix them before reporting locks in assumptions you may not like.

Bottom line

For most bitcoin holders, cost basis tracking boils down to a simple decision.

If you want simplicity, FIFO will apply automatically.

If you want flexibility, Specific Identification is allowed, but only if you do it right and document it properly.

What you should not do is assume software defaults or method labels override tax law. They do not.

Getting this right now can save you taxes, reduce audit risk, and make future filings dramatically easier. For assistance with cost basis reconstruction or documentation, please reach out to us on our Contact Us form at www.satoshipacioli.com.