What I don`t understand is, if 1 bitcoin = 1 bitcoin, and in my bitcoin wallet all my coins are lumped together, how do I know how much capital gains I have made on a PORTION of those bitcoins? I don`t know which bitcoin is which or when/where I bought each one, it`s not like they`re physical objects I can easily distinguish between. Do we average all of our fiat-to-bitcoin conversions to determine the starting basis?
The default method is LIFO which means the earliest bitcoins you bought are the ones assumed to be sold (or spent). You can also identify specific bitcoins, and that may well be useful with the ZGL-coin technique, but from the IRS point of view that is optional.
With mutual funds you can use an average cost basis technique, and on the surface that would seem reasonable for bitcoin as well, further simplifying accounting (you need only track a single number). But the IRS has not stated this method is allowed for bitcoins.
Correct except it is FIFO (likely a typo). First In - First Out.