Cost Basis (Crypto)
The original purchase price of cryptocurrency plus fees, used to calculate capital gains or losses.
What You Need to Know
Cost basis is what you paid for crypto, including all fees. When you sell, your gain or loss equals proceeds minus cost basis.
For Cryptocurrency:
- Purchase: Cost basis = purchase price + exchange fees + gas fees
- Mining/Staking: Cost basis = fair market value (FMV) when received (you already paid ordinary income tax on this)
- Gifts: Recipient takes donor's cost basis (carryover basis)
- Inheritance: Basis "steps up" to FMV at date of death
Accounting Methods (choose one):
- FIFO (First In, First Out): IRS default; sell oldest coins first
- LIFO (Last In, First Out): Sell newest coins first
- HIFO (Highest In, First Out): Sell highest-cost coins to minimize gains
- Specific ID: You identify exactly which coins you're selling (requires meticulous records)
Why It Matters: Without proof of cost basis, the IRS can treat your entire sale proceeds as taxable income (assuming $0 basis). Keep all purchase records, exchange CSVs, and wallet transaction logs.
Sources & References
This information is sourced from authoritative government and academic institutions:
- irs.gov
https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions
Related Calculators & Tools
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Related Terms in Tax Planning
Capital Gains
Profits realized from selling investments like stocks, bonds, or real estate for more than their cost basis.
FBAR (Foreign Bank Account Report)
FinCEN Form 114 requiring U.S. persons to report foreign financial accounts exceeding $10,000 aggregate value.
FIFO (First In, First Out)
Accounting method where the oldest assets are sold first—the IRS default for cryptocurrency.
Form 8949
IRS form used to report sales and dispositions of capital assets, including cryptocurrency.
HIFO (Highest In, First Out)
Tax optimization strategy where you sell the highest-cost assets first to minimize capital gains.
Tax Credit
A dollar-for-dollar reduction in tax liability, providing direct savings on taxes owed.