The FIFO method (First In, First Out) is one of the most widely used inventory valuation methods across traditional business and cryptocurrency accounting. In simple terms, FIFO means the oldest inventory or assets are sold first. In crypto, this usually means the earliest coins you bought are treated as sold first for tax and financial reporting purposes.
As of 2026, this topic is becoming even more important. Global crypto adoption continues to accelerate, with estimates suggesting between 800 million and 900 million people worldwide may hold crypto assets in 2026, up from more than 740 million holders in 2025. This rapid expansion increases the need for standardized accounting methods like FIFO across exchanges, custodians, and treasury systems.
In both physical inventory and digital assets, the FIFO method helps maintain accurate inventory value, supports financial statements, and ensures the natural flow of goods or assets is reflected in accounting.
FIFO assumes that the oldest inventory is sold first. This approach ensures that older inventory is cleared before newer purchases, helping businesses optimize inventory turnover, maintain product quality, and reduce the risk of inventory items becoming obsolete.
Today, FIFO is not just an accounting rule. In crypto infrastructure, it is part of how exchanges, custodians, and treasury systems track asset lifecycle, cost basis layers, and financial exposure across wallets and ledgers.
FIFO in crypto accounting, exchanges, and treasury systems#
In cryptocurrency, inventory is replaced by asset lots, but the logic is identical. FIFO assumes the oldest inventory - meaning the earliest purchased coins - is sold first.
Real-world crypto scenarios where FIFO is used#
• Exchange tax lot tracking when users trade or withdraw assets
• Treasury rebalancing when funds rotate between stablecoins and volatile assets
• Fund NAV calculation when reporting investor performance
• On-chain accounting for DAOs managing multi-wallet treasuries
Example#
You buy 1 BTC at $10,000.
You buy another BTC at $30,000.
You sell 1 BTC at $40,000.
Using the FIFO method, the oldest inventory is sold first. This means the cheaper inventory is used first when you calculate FIFO cost basis.
This often results in lower COGS (cost of goods sold equivalent for assets), leading to higher gross profit and higher reported taxable income during inflationary periods.
FIFO tends to work best in environments where assets accumulate over time, such as long-term crypto holdings or treasury reserves.
Simple real-world explanation:
FIFO is like spending your oldest stablecoins first before touching the ones you just bought.
What does FIFO stand for and why it exists#
FIFO stands for First In, First Out. The method assumes that the oldest products are sold first, or in crypto terms, the earliest acquired assets are disposed of first.
The FIFO method helps maintain cost control, ensures that older stock is sold first, and supports accurate financial reporting.
FIFO aligns with the natural flow of goods and is widely accepted under International Financial Reporting Standards. Unlike using LIFO, FIFO generally results in higher ending inventory value because remaining inventory reflects more recent market prices.
Most major crypto tax platforms default to FIFO unless users specify alternative inventory valuation methods.
Myth vs Reality: FIFO in crypto and accounting#
Myth: FIFO always increases taxes#
Reality: In some market cycles, FIFO can lead to higher tax exposure, but long holding periods or bear markets can reduce this effect.
Myth: FIFO is only for physical inventory#
Reality: FIFO is standard in crypto tax lot accounting and digital asset financial reporting.
Myth: FIFO is outdated#
Reality: FIFO is increasingly embedded into automated financial infrastructure and reporting engines.
Using FIFO to calculate cost of goods sold (COGS) and crypto cost basis#
To calculate FIFO cost basis or cost of goods sold, businesses track inventory layers.
Formula example#
COGS = Cost of the oldest inventory × Units sold
When prices rise, using FIFO means cheaper inventory costs are used first. This leads to lower COGS and higher gross profit.
In crypto, this can lead to higher tax exposure because higher profit is recognized.
Example layered inventory#
10 units purchased at lower cost
40 units purchased at higher cost
FIFO means costs are recorded first from cheaper inventory layers, resulting in higher reported profit during inflationary periods.
FIFO in inventory management and real-world operations#
Efficient inventory management depends on accurate tracking processes and a reliable inventory management system. FIFO is one of the most widely used methods because it ensures that older stock is used first, minimizing the risk of spoilage or loss.
Inventory problems remain massive globally. Even by 2025-2026, global retail inventory distortion - meaning stockouts and overstocks - is estimated to cost the industry roughly $1.7 trillion annually. In parallel, inventory mistakes can represent more than 6% of total global retail sales, showing how critical accurate inventory flow and valuation methods remain.
FIFO in inventory management is critical when dealing with perishable goods, items with expiration date limits, or products with short shelf life.
The FIFO method helps maintain product freshness and supports efficient inventory flow across warehouses.
Example#
In industries like food or pharmaceuticals, older stock is placed behind older stock so the oldest inventory is used first. This aligns with the natural flow of goods and supports consistent stock rotation.
Why businesses apply FIFO principles#
Following FIFO principles helps maintain accurate inventory value and improves inventory turnover rate.
FIFO ensures that older inventory is used first, helping businesses reduce the risk of waste and optimize inventory.
This approach ensures inventory flow aligns with accounting records and physical inventory movement.
FIFO also helps maintain accurate financial statements and supports better financial reporting decisions.
Modern inventory research also shows that holding inventory typically costs companies between 20% and 30% of the inventory’s value annually, which reinforces the importance of efficient stock rotation and accurate FIFO-based tracking.
FIFO vs LIFO, Average Cost, and other inventory valuation methods#
FIFO is one of the most common inventory valuation methods, but businesses also compare it with LIFO and average cost method.
Using LIFO means newest inventory is sold first. While this can reduce taxable income, it may distort inventory value and make financial reporting less transparent.
FIFO aligns better with natural operations because oldest products are sold first. It also ensures that remaining inventory reflects current market cost.
Weighted or average cost method works better when inventory items are indistinguishable, such as raw materials or bulk crypto liquidity pools.
Financial impact of using FIFO#
FIFO generally results in higher reported profit during inflationary periods because cheaper inventory is used first.
This can lead to higher gross profit and higher taxable income.
Key effects include#
• Lower COGS during rising price environments
• Higher gross margins
• Higher reported asset inventory value
• More accurate ending inventory value reflecting current market pricing
However, in some market conditions, FIFO can lead to higher tax liability because profits appear higher.
Advantages of the FIFO method#
The FIFO method helps maintain accurate inventory tracking and supports cost control.
Benefits include#
• FIFO aligns with the natural flow of goods
• Helps maintain product freshness
• Minimizes the risk of spoilage
• Supports accurate inventory valuation
• Produces higher inventory value on balance sheets
• Supports efficient inventory management
FIFO best practices include strong tracking processes, accurate physical inventory verification, and automated inventory management systems.
Disadvantages of FIFO#
While FIFO is one of the most widely used methods, it has tradeoffs.
• Can lead to higher reported profit and higher taxes
• May not reflect current replacement cost during volatility
• Requires strong tracking across multiple storage locations
Still, FIFO remains popular because it produces accurate inventory reporting and supports clear financial statements.
FIFO inside modern crypto infrastructure stack#
FIFO logic is increasingly embedded across crypto infrastructure layers:
Infrastructure layers#
• Exchange engine layer - tracks trading lot cost basis
• Custody accounting layer - tracks wallet asset history
• Treasury management layer - manages reserve allocation and rebalancing
• Compliance and tax reporting layer - calculates realized gains and liabilities
Real-world applications of FIFO across industries and crypto#
FIFO is commonly used in retail, manufacturing, and digital asset accounting.
Industries like food or pharmaceuticals rely on FIFO because shelf life and expiration date tracking are critical.
In crypto exchanges and treasury systems, FIFO helps maintain clear audit trails and ensures that older inventory is accounted for first.
How FIFO improves inventory turnover and operational efficiency#
FIFO improves inventory turnover by ensuring oldest stock is cleared first.
This helps optimize inventory levels and supports better cash flow.
Faster inventory flow means capital is recycled faster, improving liquidity and cost control.
Best practices for applying FIFO#
FIFO best practices include#
• Maintaining accurate inventory management system tracking
• Performing regular physical inventory checks
• Following FIFO storage and stock rotation rules
• Using automation to calculate FIFO accurately
Future of FIFO with automation, AI, and blockchain#
Technology is transforming how businesses apply FIFO.
Automation ensures oldest inventory is used first without manual errors.
AI enables real-time cost basis simulation and tax forecasting.
Blockchain improves transparency by tracking inventory flow and asset ownership history across supply chains and on-chain finance.
Final thoughts#
FIFO means older stock is sold first, helping businesses maintain product quality, optimize inventory, and support accurate financial reporting.
Using the FIFO method helps maintain efficient inventory management, supports higher inventory accuracy, and ensures that financial reporting reflects real operational performance.
Because FIFO aligns with the natural flow of goods and digital assets, it remains one of the most widely accepted and practical inventory valuation methods globally.
