Which Bitcoin Should You Spend? Cost Basis and the Rule Most People Missed
BitDeals.com is reader-supported. We may earn a commission when you buy through links on our site, at no extra cost to you. This is general information, not tax advice — a disposal of a few thousand dollars is worth twenty minutes of a preparer's time.
Short version: If you have bought bitcoin more than once, you do not own "bitcoin." You own a stack of separate purchases, each with its own price tag attached. Which one you spend determines your tax bill, and the difference on a single laptop purchase can be hundreds of dollars. Since 2025 the IRS has been much stricter about how you get to choose — and the choice now has to be made before you spend, not in software the following April.
The thing nobody tells you about spending bitcoin
Say you bought bitcoin three times:
March 2023 — 0.1 BTC at $28,000, so $2,800
January 2025 — 0.1 BTC at $95,000, so $9,500
August 2026 — 0.1 BTC at $72,000, so $7,200
You now hold 0.3 BTC. At roughly $76,000, that's about $22,800 — you're up meaningfully overall.
Now you buy a $3,800 laptop with bitcoin. That's roughly 0.05 BTC at today's price. Which 0.05 BTC did you just spend?
The IRS treats bitcoin as property. Spending it is a disposal, and a disposal produces a gain or loss equal to what you got minus what you paid. So:
March 2023 ($28k) — Your cost: $1,400; Proceeds: $3,800; Gain / (loss): +$2,400 gain
January 2025 ($95k) — Your cost: $4,750; Proceeds: $3,800; Gain / (loss): ($950) loss
August 2026 ($72k) — Your cost: $3,600; Proceeds: $3,800; Gain / (loss): +$200 gain
Same laptop. Same bitcoin, as far as the blockchain is concerned. A swing of $3,350 in reportable gain depending on which coins you point at. At a 24% federal rate plus California, the tax difference between the best and worst answer here is real money — on a single laptop.
This is the lever most people who spend bitcoin never touch.
The rule that changed in 2025
Two changes landed that make this both more important and harder to do casually.
Wallet-by-wallet tracking is now mandatory
Rev. Proc. 2024-28 requires taxpayers to track cost basis on a per-wallet and per-account basis, effective from January 1, 2025. You can no longer treat every coin you own as sitting in one giant universal pool.
Practically: the bitcoin in your hardware wallet and the bitcoin in your Coinbase account are separate books. If you spend from the hardware wallet, you are selecting from the lots in that wallet, not from your best lot anywhere.
This bites people who have moved coins around. If you sent bitcoin from an exchange to cold storage, the basis travelled with it — but only if you can document which purchases went in which transfer.
Retroactive lot picking is out
FIFO — first in, first out — is the default. If you do nothing, the IRS assumes you spent your oldest coins first. In the example above, that's the March 2023 lot and the $2,400 gain: the worst available answer.
You can use a different method, but only as valid specific identification, which means identifying the exact units before the disposal and documenting that identification for that wallet or account. A standing instruction with your broker — "always dispose highest-cost first" — can satisfy this if it is in place ahead of time.
What no longer works is the old habit of exporting a year of transactions to tax software in March and letting it retroactively pick the most favorable lots. HIFO as an after-the-fact software setting is not specific identification. It is a calculation dressed up as an election, and the documentation requirement is what separates the two.
And now there's a paper trail
Form 1099-DA brings broker reporting into this. Brokers began issuing them for the 2025 tax year, with basis reporting phasing in for assets acquired after January 1, 2025, and forms due to customers in February 2026.
The practical consequence: for coins you bought on an exchange and spent through that exchange, the IRS now receives a number. If the number on your return disagrees with the number on the 1099-DA, that mismatch is visible in a way it simply was not before.
Note the limit, because it is where the mess lives. A broker only reports basis for assets bought on its own platform. Coins you bought on Kraken, moved to self-custody, and later spent through a payment processor produce a proceeds figure with no basis attached. That gap is yours to fill, from your own records.
What to actually do
Ranked by how much it matters:
1. Decide before you spend, not after. This is the whole ballgame. Ten seconds of thought at the moment of payment is worth more than any software you buy in April. Note which lot you're spending, in writing, with a timestamp.
2. Set a standing instruction where you can. If you spend regularly through one exchange or card, put a documented standing instruction in place with that provider. It converts a per-transaction chore into a one-time decision.
3. Keep the wallets separate on purpose. Since tracking is per-wallet anyway, use that. Many people who spend bitcoin regularly keep a dedicated spending wallet funded from a known lot, and leave long-term holdings untouched in a hardware wallet or a Trezor. The basis question then has one obvious answer every time.
4. Reconcile before year-end, not in April. If a 1099-DA is going to show proceeds with no basis, you want to find that in November while you can still locate the original purchase confirmation.
The counterintuitive part
The instinct is to always spend the highest-cost coins, because that minimizes the gain. Often right — not always.
If you are sitting on a loss, spending that lot realizes a capital loss, which offsets other gains and, above that, up to $3,000 of ordinary income per year. That can be more valuable than avoiding a small gain.
If a lot is close to the one-year mark, holding a few more weeks converts short-term treatment into long-term, which is taxed materially better. Spending a lot at 11 months when you could have spent it at 13 is an avoidable own goal.
If your income is unusually low this year, a long-term gain may face a 0% federal rate — in which case realizing gains is close to free, and spending your cheapest coins can be the right move.
One caution: the wash-sale rule as written applies to securities, and its application to digital assets has been the subject of ongoing legislative proposals. Do not build a loss-harvesting habit around a rule you assume will keep working. That is a conversation to have with a preparer, not a blog.
Where this leaves you
You do not need to become an accountant to spend bitcoin. You need one habit: know which coins you're spending before you spend them, and write it down.
Everything else — the software, the reconciliation, the forms — gets dramatically easier once that one note exists. And if you've been spending bitcoin all year without it, the fix is not to panic. It's to start now, and to reconstruct what you can while the exchange export still goes back far enough.
We covered the mechanics of keeping those records in how to keep records when you spend bitcoin, and the software that automates the boring half in the best crypto tax software for spenders.
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