Unfortunately, cost basis can be difficult to track — which can lead to issues when tax season rolls around.
In this article, we’ll break down everything that crypto investors need to know about cost basis. We’ll explain what crypto cost basis is, break down how to calculate it in different situations, and show an easy way to help you track cost basis across wallets and exchanges.
Crypto taxes 101
Before we explain how cost basis works, let’s break down the basics of crypto taxation.
In the United States, cryptocurrency is considered a form of property subject to capital gains and income tax.
Like other forms of property, investors must incur capital gains or capital losses when they dispose of their cryptocurrency. Some examples of disposal events include:
- Selling cryptocurrency for fiat
- Trading cryptocurrency for other cryptocurrencies
- Purchasing goods/services using cryptocurrency.
For more information, check out our complete guide to crypto taxes.
What is cost basis?
Cost basis is the price you pay to acquire your cryptocurrency. Knowing your cost basis is essential to calculate your capital gains and losses.
How do I determine the cost basis of my cryptocurrency?
In most cases, your cost basis is how much you paid to acquire your cryptocurrency. Typically, this is the fair market value of your cryptocurrency at the time of receipt plus the cost of any fees related to acquiring your crypto.
What are proceeds and how do I calculate this?
The proceeds of your sale are how much you received for disposing of your cryptocurrency. Typically, this is the fair market value of your crypto-asset at the time of disposal, minus the cost of relevant fees.
Why do I need to know my cost basis to calculate my crypto taxes?
Cost basis is essential for calculating your capital gains and losses. Here’s an example.
Example:
Scott buys $1,500 of BTC.
Scott’s BTC rises in value to $2,000.
Scott sells his BTC.
What is Scott’s capital gain?
To determine how much he’ll incur in capital gains, Scott can use the formula below.
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In this case, Scott’s cost basis is $1,500. Meanwhile, the fair market value of his Bitcoin at the time of disposal is $2,000. By plugging in these values, we get the following result.
$2,000 proceeds - $1,500 cost basis = $500 capital gain
It’s important to remember that how much tax you pay on your capital gain is dependent on other factors, such as your income bracket for the year and how long you held your cryptocurrency. For more information, check out our guide to crypto tax rates.
Why do I need a cost basis method?
If you’ve bought cryptocurrency at multiple price points, you’ll need to use an accounting/cost basis method to calculate your cost basis. Consider the following example.
Example:
Ralph buys 1 BTC for $30,000.
Later, Ralph buys 1 BTC for $40,000.
Ralph then buys 1 BTC for $38,000.
One year later, Ralph sells 1 BTC for $45,000.
At first glance, it may be difficult to tell what the cost basis of Ralph’s Bitcoin should be since he bought BTC at multiple price points. To find his capital gain, Ralph will need to select a cost basis method.
What cost basis method should I use for cryptocurrency?
Cost basis methods determine the order in which you dispose of your cryptocurrency. The most common methods to use for cryptocurrency are FIFO, LIFO, and HIFO.
FIFO
With FIFO (first-in first-out), the first cryptocurrency you acquire is also the first you dispose of. In the United States, FIFO is considered the ‘default’ method for calculating capital gains.
In the example above, the cost basis would be $30,000. Using FIFO, Ralph’s capital gain would be $15,000.
LIFO
With LIFO (last-in first-out), the last cryptocurrency you acquire is the first you dispose of.
In the example above, the cost basis would be $38,000. Using LIFO, Ralph’s capital gain is $7,000.
HIFO
With HIFO (highest-in first-out), the highest-value cryptocurrency you acquire is the first you dispose of. HIFO is considered the best cost basis method for minimizing capital gains.
In the example above, the cost basis would be $40,000. Using HIFO, Ralph’s capital gain is $5,000.
Can I change my cost basis method from one year to the next?
While you are allowed to change your cost basis method from one year to the next, it’s generally recommended to speak with a tax professional before doing so.
Switching your cost basis from year-to-year may lead to potential issues with the IRS. For example, if you use FIFO one year and then HIFO the next, it’s possible you may use the same batch of cryptocurrency twice to calculate your cost basis. This may lead to penalties and fines.
For more information about cost basis methods, check out our guide to FIFO, HIFO, and LIFO.
How do wallet transfers impact my cost basis?
When you transfer cryptocurrency between different wallets and exchanges, your cost basis remains the same. However, you may have trouble determining your capital gain and losses if you haven’t kept careful records of your cost basis.
Do Coinbase and other exchanges show cost basis?
If you’ve purchased your cryptocurrency on an exchange like Coinbase, you can find your cost basis by looking at your exchange records. However, exchanges won’t know your cost basis in cases where you transferred your cryptocurrency.
What happens when you don’t know the cost basis of your cryptocurrency?
If you don’t have information on the cost basis of your cryptocurrency, you can estimate it by finding the historical price of your cryptocurrency at the time that you acquired it.
If you don’t know the historical price of your cryptocurrency, you may need to treat the cost basis of your crypto as $0. That means the entire proceeds of your sale should be treated as a capital gain.
How is cost basis determined for crypto-to-crypto transactions?
Many crypto investors trade one cryptocurrency for another — such as the example transaction below.
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In cases like these, your cost basis in the newly-acquired cryptocurrency is equal to its fair market value at the time of receipt, plus the cost of any relevant fees. In this case, Jack’s cost basis in Ethereum is $1,500.
Meanwhile, Jack’s proceeds in the BTC that he disposed of is also equal to $1,500. He will incur a capital gain or loss on his BTC depending on how the price changed since he originally received it.
It can be difficult to determine the fair market value of your cryptocurrency in USD terms. Many exchanges do not quote crypto-to-crypto trades in USD. In this case, crypto tax software like CoinLedger can help. Simply upload your trades, and the platform’s historical price engine will take care of the rest.
Are transaction/gas fees included in cost basis?
In the past, the IRS has said that any costs that are incurred for acquiring/selling property can be included within cost basis. It’s therefore reasonable to assume that any costs associated with buying and selling crypto can be included in the cost basis, whether it’s exchange transaction fees or blockchain gas fees.
Example:
Lila buys Ethereum.
She pays $400 for ETH and pays $10 in gas fees.
Lila’s cost basis is $410.
What is the cost basis for airdrops?
Some cryptocurrency projects airdrop tokens to users to build awareness and community.
If you receive airdrop rewards, the cost basis of your airdropped tokens is the fair market value of the tokens at the time they were received. If the token has no fair market value at the time of the airdrop, you can use the fair market value at the time that a market for the cryptocurrency becomes available.
What is the cost basis for staking and mining rewards?
If you’ve received cryptocurrency from staking or mining, your cost basis is equal to the fair market value of your rewards at the time of receipt.
How do I determine the cost basis for a cryptocurrency gift?
Determining the cost basis of gifted cryptocurrency can vary depending on your specific situation. It's recommended that you keep records of the gifter's original cost basis for acquiring the cryptocurrency as well as the fair market value of the cryptocurrency at the time of receipt.
For more information, check out our guide to cryptocurrency gift taxes.
How does the IRS know your cost basis?
Exchanges like Coinbase and Gemini send 1099 forms to the IRS, which contains customer information and data on cryptocurrency transactions.
In the future, the IRS will have even more access to taxpayer data. The Build Back Better Act requires centralized and decentralized exchanges to report all capital gains and losses starting in the 2025 tax year.
How to track your cost basis
If you have trouble tracking your cost basis across multiple wallets and exchanges, crypto tax software can help.
CoinLedger is built to help you aggregate all of your crypto transactions, making it easier than ever to track your cost basis over time and keep a complete record of your gains and losses.
Just plug in your wallets and exchanges, and CoinLedger can automatically find your cost basis for your cryptocurrencies and NFTs.
Get started with crypto tax software
You don’t need to rely on a spreadsheet to keep track of your cost basis for each one of your crypto-assets. Instead, you can get started with CoinLedger, the crypto tax software trusted by more than 500,000 investors.
CoinLedger automatically integrates with your blockchains, wallets, and exchanges — allowing you to generate a complete tax report in minutes.
Get started with a free account today.
