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Crypto Law/Level II · Tax: the first trap/2.3 Records and reporting/Lesson 1

Cost basis and lot selection

What you paid decides your taxable gain, and which units count as sold depends on rules that changed for US holders on 1 January 2025.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Specific identification lets you sell the highest-cost lots first and shrink the gain (IRS FAQ 39); identify units no later than the sale, wallet by wallet under Treas. Reg. §1.1012-1(j), with records meeting FAQ 40.
  2. At a broker, a standing order such as highest-basis-first can do the identifying; Notice 2025-7 let 2025 identifications sit in your own books, so check whether that relief continues before relying on it.
  3. Include every acquisition fee and commission in basis (IRS FAQ 8) and subtract selling fees under Treas. Reg. §1.1001-7; free exchange CSV exports usually supply both figures.
  4. Prefer lots held more than a year: they qualify for the 2026 0% long-term band up to $49,450 taxable income single or $98,900 joint under Rev. Proc. 2025-32.
  5. Rev. Proc. 2024-28 allowed an irrevocable allocation of unused basis to each wallet as of 1 January 2025; whatever allocation you made binds later sales, so keep it with your records.

MaterialsThe IRS Frequently Asked Questions on Virtual Currency Transactions (FAQs 8, 39-41) on irs.govRev. Proc. 2024-28 and Notice 2025-7, the IRS transition guidance on basis and lot identificationA full trade history export (CSV) from every exchange account and a block explorer view of each self-custody wallet you use

Wonder

  1. If I bought the same coin at five different prices, which purchase did I just sell?
  2. Can I choose the most expensive lot to make my gain smaller?
  3. What changed in 2025 when the IRS moved to wallet-by-wallet accounting?

Explore

  1. In US federal tax, gain or loss on crypto is the amount you receive minus your basis. Basis, often called cost basis, is what you paid to acquire the asset in US dollars, including fees, commissions and other acquisition costs (IRS Virtual Currency FAQ 8). If you received crypto as pay or as a reward, your basis is generally the fair market value you reported as income when you received it (lessons 2.2.1 to 2.2.4). Because crypto is property for US tax (lesson 2.1.1), every sale, swap or purchase with crypto needs a basis figure. Without one, nothing on the return can show that the whole amount received was not profit.
  2. Most holders buy the same coin many times at different prices. Each purchase is a separate lot, with its own basis and its own acquisition date. When you sell only part of your holdings, the law needs a rule for which lots left. IRS FAQ 39 says you may choose which units are treated as sold if you can specifically identify them and substantiate their basis. FAQ 41 gives the default: if you do not identify units, they are treated as sold first in, first out (FIFO), meaning the earliest units you acquired go first. Choosing a high-basis lot can shrink a gain; FIFO in a rising market usually enlarges it.
  3. Specific identification needs proof. Under FAQ 40, you can identify units by a unique identifier or by records of the units held in a single account, wallet or address showing when each unit was acquired, its basis and value at acquisition, when it was disposed of, and its value and the proceeds at disposal. A choice made after the year ends, when you already know which answer saves tax, is not specific identification. Under the rules that apply from 2025, the identification has to be made no later than the date and time of the sale, which is why record-keeping (lesson 2.3.7) is the backbone of lot selection.
  4. On 9 July 2024 the Treasury published final broker regulations, T.D. 10000. One part, Treas. Reg. §1.1012-1(j), applies to acquisitions and dispositions of digital assets on or after 1 January 2025. It applies the identification and FIFO rules to units held within a single wallet or account, not across everything a person owns. So the basis of a coin sold from an exchange account must come from units in that account, and a sale from a self-custody wallet uses lots in that wallet. Many people had previously used a universal approach, pooling all their wallets together; that approach no longer works for disposals from 2025 on.
  5. To ease the change, Rev. Proc. 2024-28 gave a safe harbor for allocating unused basis to the units actually sitting in each wallet or account as of 1 January 2025. Holders could make a specific allocation of particular lots or a rule-based global allocation, and any allocation is irrevocable. For units held by a broker, the regulation lets you identify lots by instruction to the broker, including a standing order. Because many brokers lacked the systems, Notice 2025-7 let holders record their identification or standing order in their own books and records for sales during 2025. Check whether the IRS has extended or replaced that relief before relying on it later.
  6. A practical check: for one coin, list every lot you hold today by wallet or exchange account, with date, quantity and dollar cost including fees. Then compare that list with the basis your exchange shows. Gaps are common when coins were moved in from another wallet, because the receiving platform often does not know what they cost (lesson 2.1.6). This lesson explains the rules; it does not recommend a lot method or a trade. Which method lowers tax depends on prices, holding periods (lesson 2.3.2) and your other income, and a qualified tax adviser can review the facts.

Key facts

  • IRS FAQ 8 defines the basis of virtual currency as the amount spent to acquire it, including fees, commissions and other acquisition costs in US dollars.
  • If units are not specifically identified, IRS FAQ 41 treats them as disposed of first in, first out (FIFO).
  • Treas. Reg. §1.1012-1(j), from T.D. 10000 published on 9 July 2024, applies to digital asset acquisitions and dispositions on or after 1 January 2025.
  • From 2025 the identification and FIFO rules apply wallet by wallet or account by account rather than across all of a person’s holdings.
  • Rev. Proc. 2024-28 lets taxpayers make an irrevocable reasonable allocation of unused basis to the units in each wallet or account as of 1 January 2025.
  • Notice 2025-7 let taxpayers identify broker-held units, or record a standing order, in their own books and records for sales from 1 January to 31 December 2025.

Exercise nine, six, three, one

9CollectList up to 9 purchases or receipts of one crypto asset you hold or have studied, noting for each the date, quantity, dollar cost including fees, and the wallet or account where the units sit today.
6ClusterSort them into 6 categories: exchange purchases with full records, self-custody lots with full records, units received as income, units moved between wallets, lots with missing cost, and lots you are unsure about.
3DistillReduce the 6 categories to 3 groups: lots whose basis you can prove today, lots you could reconstruct from exports or explorers, and lots you cannot document.
1CrystallizeWrite 1 sentence explaining, in your own words, why the choice of which units you sold must be fixed by the time of the sale rather than at tax time.

Fact check

Dates, figures and claims checked against the published sources listed below.

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