Tax Lots, Wash Sales, and Crypto: What Tradesmen Actually Track
Two traders with identical P&L can owe wildly different tax bills depending on how their lots were tracked. The IRS doesn't care that you didn't know — but you should.
What a "tax lot" is
A tax lot is a specific batch of shares (or coins) acquired in a single transaction. Each lot has its own:
- Cost basis — what you paid (including fees)
- Acquisition date — when the holding period started
- Quantity — how many shares/coins in this lot
If you bought 100 SOL three times — 50 at $80, 30 at $120, 20 at $200 — you have three tax lots, not one position. When you sell 40 SOL, the IRS asks: which lot did those 40 come from?
The four lot identification methods
FIFO (First In, First Out)
The default for most brokerages and the IRS fallback. In a rising market, FIFO produces the largest taxable gain because the oldest (cheapest) lots get sold first.
LIFO (Last In, First Out)
Sells your most recent purchases first. Useful in a falling market — your newest, higher-cost lots get sold at a smaller gain or larger loss.
HIFO (Highest In, First Out)
Always sells the lot with the highest cost basis first, regardless of date. Generally produces the smallest taxable gain. Most popular among active crypto traders for this reason.
Specific Identification
You designate exactly which lot is being sold, trade by trade. Maximum flexibility — and maximum recordkeeping burden. The IRS requires contemporaneous records (you can't pick lots retroactively after the year ends, in theory).
Holding period: short-term vs long-term
US capital gains have two regimes based on holding period:
| Holding period | Tax rate (US, 2026) |
|---|---|
| ≤ 1 year (short-term) | Ordinary income rates (10% – 37% federal) |
| > 1 year (long-term) | 0%, 15%, or 20% depending on income |
Difference between selling a lot at day 364 vs day 366: a trader in the 32% bracket pays 32% vs 15% on that gain. On a $20,000 gain, that's $3,400 of tax avoided just by waiting 2 days.
The wash-sale rule (and why crypto is different)
Wash-sale rule (IRS §1091): if you sell a stock at a loss and buy "substantially identical" shares within 30 days before or after, the loss is disallowed for current-year deduction. Instead, it's added to the cost basis of the replacement shares.
Buying "substantially identical" security in that window → loss disallowed
Crypto's loophole (as of 2026)
The wash-sale rule applies to "stocks and securities." The IRS has classified crypto as property, not securities. Result: wash-sale rules currently do NOT apply to crypto.
This means a crypto trader can sell BTC at a loss, immediately rebuy BTC, and still claim the loss for tax purposes. Equity traders cannot do this.
Tax-loss harvesting (the legal arbitrage)
Active crypto traders systematically harvest losses by selling losing positions in December, banking the realized loss, and rebuying immediately. The realized loss offsets gains elsewhere (or up to $3,000 of ordinary income, with carryforward).
Year-end TLH example (crypto only)
What active traders actually track
| Field | Why |
|---|---|
| Acquisition date & time | Holding period; LT vs ST |
| Acquisition price | Cost basis |
| Acquisition fees | Add to basis |
| Quantity | Lot identity |
| Disposal date & price | Realization event |
| Disposal fees | Reduce proceeds |
| Lot ID method elected | Auditable trail |
| Wallet/exchange location | Some methods are per-account |
| Wallet transfers | Not taxable, but breaks naive tracking |
| Airdrops, staking rewards, forks | Income at FMV on receipt; new basis |
The transfer trap
Moving 5 ETH from Coinbase to a self-custody wallet is not a taxable event — but most exchanges report the outflow as a "send" with no destination context. If you later sell that ETH from your self-custody wallet and plug the data into TurboTax naively, the software has no idea what your basis is and may report the entire sale as gain. Always reconcile transfers across all your wallets/exchanges before computing taxes.
The tools traders use
Manual tracking works up to ~50 trades/year. Past that, you need software:
- CoinTracker / Koinly / CoinLedger — pull from exchanges + wallets, reconcile transfers, compute LT/ST gains, generate IRS Form 8949
- TaxBit — used by exchanges directly; cleaner for high-volume traders
- Spreadsheet + cost-basis script — viable up to a few hundred trades; gets ugly past that
The mistakes that cost the most
- Defaulting to FIFO when HIFO would save thousands — many crypto exchanges let you elect a different method but you have to opt in.
- Forgetting staking/airdrop income — taxable as ordinary income at FMV when received. Missing this triggers IRS notices years later.
- Not tracking gas fees — failed transactions and gas costs on swaps reduce your taxable basis or add to acquisition cost. Most retail leaves this on the table.
- Trading futures without §1256 awareness — regulated futures contracts get 60/40 LT/ST treatment regardless of holding period. Crypto perps usually don't qualify.
- Selling at year-end without holding-period check — selling on day 364 vs day 366 can mean a 17-percentage-point tax difference.