Your cost basis is the total purchase amount plus any fees you paid when you purchase a cryptocurrency. Knowing your cost basis is necessary to determine your gains or losses at tax time, so accurate tracking is essential to meet IRS requirements. Understanding cost-basis can help you minimize your tax bill and lower your chances of an audit.
Note: Starting January 1, 2025, US taxpayers must adopt the ‘per wallet’ or ‘per account’ cost basis method. This requires matching asset sales with the cost basis from purchases or acquisitions within the same wallet or account, reinforcing the ‘per wallet’ approach.
What is crypto cost basis?
Crypto cost basis is the total purchase price and associated fees incurred when acquiring a cryptocurrency asset. It establishes the asset’s value for tax purposes and is critical for determining capital gains or losses when the asset is sold or disposed of.
Tracking cost basis is particularly important for those with extensive crypto transactions. Each trade or sale requires accurate reporting of gains or losses to comply with IRS guidelines. Taxpayers risk overpaying taxes or facing penalties during an audit without accurate records.
Learn how to avoid a crypto tax audit.
How to calculate cost basis for crypto
To calculate cost basis, add the asset’s purchase price and any associated fees. For example, if you purchased $1,000 of Bitcoin (BTC) and paid a $20 transaction fee, your total cost basis would be $1,020.
Looking to calculate your crypto profit? Try our free crypto profit calculator.
How to calculate proceeds for crypto
Proceeds refer to the amount received from the sale or disposal of a cryptocurrency asset. For example, if you sold BTC for $2,000 and paid a $50 fee, your proceeds would be $1,950.
How to calculate capital gains for crypto
Capital gains or losses are calculated by subtracting the cost basis from the proceeds. Using the examples above, proceeds of $1,950 minus a cost basis of $1,020 result in a $930 capital gain.
Why are there different cost basis methods for crypto?
The IRS allows taxpayers to use different cost basis methods under the Specific Identification framework, provided detailed records are maintained. Each method impacts taxable gains and losses differently.
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FIFO (First-In, First-Out): Assumes the first assets purchased are the first sold. This can result in higher taxable gains in rising markets, as earlier purchases are typically at lower prices.
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LIFO (Last-In, First-Out): Assumes the most recent purchases are the first sold. This may reduce gains in certain scenarios, especially in volatile markets.
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HIFO (Highest-In, First-Out): Prioritizes selling assets with the highest purchase price first. This method can reduce taxable gains but requires detailed record-keeping.
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Minimization (TokenTax Method): Our proprietary, tax-rate-adjusted HIFO algorithm selects the most tax-efficient assets to sell, factoring in short- and long-term capital gains rates for optimized tax savings.
Choosing the most appropriate method depends on your financial strategy and market conditions.
Looking to calculate your crypto taxes? Try our free crypto tax calculator.
FIFO cost basis crypto accounting method
FIFO assumes the first crypto assets acquired are the first sold. This is often the default method and works well when early purchases have lower costs.
HIFO cost basis crypto accounting method
HIFO minimizes taxable gains by selling assets with the highest purchase price first. This method requires accurate tracking of individual purchase prices and is ideal for active traders looking to reduce tax liability.
LIFO cost basis crypto accounting method
LIFO assumes the most recent crypto purchases are the first sold. This can be advantageous in volatile markets where recent purchases were at higher prices.
FIFO vs. HIFO vs. LIFO: Which cost basis method saves taxes?
HIFO often provides the most significant tax savings because it prioritizes assets with the highest cost basis, reducing taxable gains. FIFO and LIFO can also be useful depending on the timing of purchases and the state of the market.
Why is crypto cost basis important for my crypto taxes?
Crypto cost basis establishes the taxable gain or loss for each transaction. Without accurate cost basis records, you may pay taxes on the entire proceeds instead of only the net gain, leading to an inflated tax bill.
The IRS uses blockchain analytics and data from exchanges to verify taxpayer filings. Inaccurate or incomplete cost basis reporting can result in crypto tax audits, penalties, or additional tax liabilities. Maintaining detailed records helps ensure compliance and reduces risk.
What you can do if you don’t know your crypto cost basis
If your cost basis records are incomplete, you can estimate it using historical price data or consult exchange records. Many online tools provide historical price information to help reconstruct missing data.
Working with a crypto tax professional can help ensure compliance in complex scenarios. They can guide you through acceptable estimation methods and reduce the risk of an IRS audit.
How do you calculate missing cost basis for crypto?
Missing cost basis can be estimated by referencing historical prices at the time of acquisition. However, this method may not be as precise as maintaining complete transaction records.
We recommend using crypto tax software and/or consulting with a crypto tax professional to reconstruct cost basis data, especially if transactions span multiple exchanges or wallets.
Which exchanges show crypto cost basis?
Exchanges like Coinbase and Binance often provide cost basis details for assets purchased on their platforms. However, transferred assets may not include cost basis information, requiring manual calculations or external tracking.
Maintaining personal records ensures that your cost basis is accurate, even when moving assets between platforms. Crypto tax software can help consolidate this data and simplify reporting.
How to track your cost basis
Every transaction must be recorded to properly track cost basis, including purchase price, fees, and acquisition and disposal dates. Consistent record-keeping across exchanges and wallets is essential.
Crypto tax software can automate this process by consolidating data from multiple sources, ensuring accuracy and reducing manual work. Reliable cost basis tracking minimizes tax liability and ensures compliance with IRS requirements.
Get started with our crypto tax software
TokenTax automates cost basis tracking and gain/loss calculations across multiple exchanges and wallets. The Minimization algorithm ensures the most tax-efficient strategy by selecting assets with the lowest taxable gain potential.
Our platform simplifies tax preparation and provides expert support for accurate reporting and reduced liability. Whether you’re a casual investor or a professional trader, TokenTax helps streamline the process.
Crypto cost basis FAQs
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