What Is Cost Basis in Crypto and How Do You Calculate It?

Cost basis is the original value of an asset for tax purposes, representing the total amount spent to acquire it. This figure is the starting point for determining profit or loss when a cryptocurrency is sold, traded, or otherwise disposed of. Since every disposal can trigger a taxable event, a correct cost basis is necessary to determine the resulting capital gain or loss.

Calculating Your Initial Crypto Cost Basis

The method for determining your initial cost basis depends on how you acquired the cryptocurrency. Each acquisition method has a specific rule for establishing this value for future tax calculations.

Purchasing with Fiat Currency

When buying cryptocurrency with U.S. dollars, the cost basis is the purchase price plus any transaction fees. These fees can include charges from the exchange or network fees, also known as “gas fees.” For instance, if you purchased 0.1 Bitcoin for $5,000 and paid a $50 transaction fee, your cost basis for that 0.1 Bitcoin is $5,050.

Crypto-to-Crypto Trades

Trading one cryptocurrency for another is a taxable event. The cost basis of the new crypto is its fair market value in U.S. dollars at the time of the trade. For example, if you trade Ethereum valued at $2,000 for another token, the cost basis for your new tokens is $2,000, regardless of what you originally paid for the Ethereum.

Receiving as Income or Payment

If you receive cryptocurrency as payment for services or as wages, your cost basis is its fair market value in U.S. dollars on the date you received it. This amount is also considered ordinary income and is subject to income tax. For example, if you are paid 0.5 Ethereum for freelance work when its market value is $1,500, your cost basis for that 0.5 Ethereum is $1,500.

Mining and Staking Rewards

For crypto earned through mining or staking, the cost basis is the fair market value of the coins when they were mined or when the rewards were made available to you. This value must be reported as income for that year. If you mined a coin worth $300 on the day it entered your wallet, your cost basis for that coin is $300.

Airdrops and Hard Forks

When you receive coins from an airdrop or a hard fork, the cost basis is their fair market value at the time you gain control over them. If the fair market value is zero when you receive the coins, your cost basis is also zero.

Gifts

For cryptocurrency received as a gift, the recipient takes on the donor’s original cost basis. For example, if a friend gifts you one Bitcoin that they purchased for $10,000, your cost basis is also $10,000, regardless of its market value when you received it. This is known as a “carryover” basis.

Accounting Methods for Tracking Cost Basis

When you own multiple units of the same cryptocurrency bought at different prices, an accounting method determines which coins are considered sold. This choice impacts the calculation of your capital gains or losses. The IRS allows for several methods, each with different strategic advantages.

First-In, First-Out (FIFO)

The First-In, First-Out (FIFO) method assumes that the first units of a cryptocurrency you acquired are the first ones you sell. This is often the default method used by crypto exchanges and tax software. For example, if you bought one Bitcoin at $30,000 in January and a second at $40,000 in June, selling one for $50,000 under FIFO assumes you sold the January coin. This results in a capital gain of $20,000 ($50,000 – $30,000).

This approach is straightforward but may not be the most tax-efficient in a rising market, as selling the oldest assets first can realize larger capital gains.

Highest-In, First-Out (HIFO)

The Highest-In, First-Out (HIFO) method assumes you sell the units of cryptocurrency with the highest purchase price first. This strategy is often used to minimize taxable gains. Using the previous example, if you sold one Bitcoin for $50,000, HIFO would assume you sold the coin purchased for $40,000. This results in a smaller capital gain of $10,000 ($50,000 – $40,000). While HIFO can be advantageous for tax minimization, it requires more detailed record-keeping than FIFO, as you must track the cost basis of each unit of crypto.

Specific Identification (Spec ID)

The Specific Identification (Spec ID) method provides the most flexibility by allowing you to choose exactly which units of a cryptocurrency you are selling. This gives you precise control over your capital gains or losses. To use this method, you must maintain detailed records that identify the specific coins being sold, including their acquisition date, cost basis, and sale date. For instance, if you owned three Bitcoins purchased at $30,000, $40,000, and $60,000, and sold one when the price is $50,000, Spec ID allows you to choose which one to sell. Selling the $60,000 coin would generate a $10,000 capital loss, which could offset other gains.

Using Cost Basis to Determine Capital Gains and Losses

After establishing the cost basis for the cryptocurrency you sold, you can calculate your capital gain or loss. The calculation is straightforward, but the tax treatment depends on how long you held the asset.

The formula is the sale proceeds minus your cost basis. Proceeds are the total U.S. dollar value you received from the sale. A positive result is a capital gain, while a negative result is a capital loss.

A short-term capital gain results from selling a crypto asset held for one year or less. These gains are taxed at your ordinary income tax rates, which range from 10% to 37% at the federal level.

A long-term capital gain is from selling an asset held for more than one year. These gains are taxed at more favorable federal rates of 0%, 15%, or 20%, depending on your taxable income. The lower rate for long-term gains creates an incentive to hold assets for longer periods.

These transactions must be reported to the IRS. Each sale or trade is detailed on Form 8949, Sales and Other Dispositions of Capital Assets. You will list the crypto’s description, acquisition and sale dates, sales price, cost basis, and the gain or loss. Totals from Form 8949 are then summarized on Schedule D, Capital Gains and Losses, and filed with your Form 1040 tax return.

Special Considerations and Rules

Several specific rules can affect your cost basis and the reporting of gains and losses. Understanding these situations is important for maintaining compliance and making informed financial decisions.

The Wash Sale Rule

The wash sale rule, which applies to securities like stocks, does not currently apply to cryptocurrencies because the IRS classifies crypto as property. The rule prevents taxpayers from claiming a capital loss on a security if they purchase an identical one within 30 days before or after the sale. Because this rule does not cover crypto, investors can sell a cryptocurrency at a loss to offset capital gains and then immediately buy it back. However, there have been legislative proposals aimed at applying wash sale rules to digital assets.

Lost or Stolen Crypto

Under current tax law, you cannot claim a simple theft or casualty loss for personal crypto assets that are lost, hacked, or stolen. A capital loss may be recognized only when you can definitively prove the asset is entirely unrecoverable. At that point, you can treat the event as a disposition with a sales price of $0. This results in a capital loss equal to your adjusted cost basis in the asset.

No Records or Unknown Cost Basis

Failing to maintain adequate records of your cryptocurrency purchases can have significant tax consequences. If you cannot prove your cost basis for a particular asset, the IRS is entitled to assume a cost basis of zero. This means the entire proceeds from the sale would be treated as a taxable capital gain. For example, if you sell one Ethereum for $3,000 but have no records of its purchase price, the IRS will use a cost basis of $0, resulting in a taxable gain of $3,000.