What are the disadvantages of using HIFO method when reporting cryptocurrency on taxes?

This is really helpful, but I'm still confused about the record-keeping part. I use a crypto exchange that tracks all my purchases automatically. Isn't that enough documentation for the IRS? And would they really know if I switched methods from one year to the next?

The exchange records are a good start, but they may not be comprehensive if you've ever moved crypto between wallets or used multiple exchanges. The IRS would expect you to have complete records of every transaction, including transfers between your own wallets. As for switching methods, while the IRS doesn't explicitly prohibit changing from year to year for crypto (unlike stocks where consistency is required), doing so purely to minimize taxes could potentially be viewed as tax avoidance. Consistency helps demonstrate you're using a method for legitimate accounting purposes rather than just to reduce taxes.

How does it handle DeFi transactions? I've got some complicated staking and liquidity pool earnings that have been a nightmare to track for tax purposes. Does the system understand all that stuff or is it just for basic buying/selling?

I've tried other crypto tax software before and ended up with errors that cost me a lot. How confident are you that their calculations are actually correct? The IRS guidance on crypto is still pretty vague in some areas.

It handles DeFi transactions surprisingly well. I had a bunch of staking rewards and liquidity pool transactions that it correctly categorized. You do need to connect your wallet addresses, but once you do that, it pulls everything in and classifies it properly. The calculations have been spot-on in my experience. What sets them apart is they stay updated with the latest IRS guidance and have tax professionals who review edge cases. They even generated a detailed audit trail document explaining how they calculated everything, which would be gold if the IRS ever questioned anything.

Wait, how does this even work? The IRS phone system is famously impossible to get through. Are they somehow jumping the queue or do they have special access? Seems fishy to me.

This sounds like snake oil. I've tried EVERYTHING to get through to a human at the IRS and it took weeks. There's no way this actually works as advertised - the IRS phone systems are designed to be impenetrable.

It's not queue jumping in an improper way. They use automated technology to navigate the IRS phone tree and wait on hold for you. When a human finally answers, you get a call connecting you directly to that agent. It's all aboveboard - they're just handling the frustrating waiting part. They've figured out the optimal times to call and which menu options actually work, based on thousands of calls. Nothing fishy about it - they're just more efficient at navigating the system than individuals who rarely call the IRS.

I hadn't thought about the wash sale angle at all. Do we know when these rule changes might happen? I've definitely been doing some selling and rebuying to optimize my tax situation. Would previously filed returns be affected if they change the rules, or would it only apply going forward?

The proposed changes have been floating around for a while but haven't been implemented yet. Generally, tax changes aren't retroactive, so your previous returns should be safe. But going forward, you'd need to be careful about selling and rebuying within a 30-day window if they do apply wash sale rules to crypto. If you're concerned, the safest approach is to document your reasoning for using HIFO now, show consistency in your method, and keep immaculate records. That way, even if rules change, you can demonstrate you were following the guidance available at the time you filed.

TurboTax can handle basic crypto but honestly struggles with anything beyond simple transactions. For 50+ transactions across multiple exchanges, you'll find it frustrating. I switched to CoinTracker which integrates with TurboTax and it made HIFO calculations much easier.