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Crypto Cost Basis Guide: Everything You Need to Know to File Your Taxes
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Crypto cost basis is needed to determine the tax consequences of crypto transactions. It represents the original purchase price of a crypto asset, with fees, and is used to calculate capital gains or losses.
Accurate record-keeping of your crypto transactions with crypto tax software like TokenTax helps you to efficiently determine your cost basis, ensure proper tax filing, and avoid potential penalties for incorrect reporting.
What is crypto cost basis?
“Crypto cost basis” refers to the original purchase price or value of a cryptocurrency asset. It represents the amount you initially paid to acquire a given cryptocurrency, with fees. We use cost basis to calculate the capital gains or losses when you sell, trade, or dispose of the cryptocurrency.
Cost basis is essential to determine the tax consequences of your cryptocurrency transactions. When you sell or exchange crypto, the difference between the sale price and the cost basis determines whether you have a capital gain or a capital loss. Taxable capital gains events in crypto occur when you:
Sell crypto for fiat.
Trade crypto for other crypto.
Use crypto to purchase goods or services.
In short, cost basis is the price paid to acquire a given cryptocurrency, including fees. It is essential to know how to calculate cost basis for crypto in order to properly determine your tax liability.
How to calculate cost basis for crypto
Calculating your cost basis for crypto is generally straightforward. Here is an example of how to calculate cost basis for crypto:
Tim purchases $1,000 worth of ETH.
This purchase involved a $30 gas fee.
Tim’s cost basis for this purchase is $1,030.
How to calculate proceeds for crypto
Now that we know how to calculate cost basis for crypto, which occurs at acquisition, we can look at what happens when you sell. The amount you receive from a sale of cryptocurrency represents the proceeds gained from its disposal. Typically this corresponds to the fair market value of your crypto asset at the time of disposal, after fees.
Following on the example above:
Tim sells his ETH (acquired for $1,030) for $1,500.
This sale involves a $10 gas fee.
Tim’s proceeds from this sale are $1,490.
How to calculate capital gains for crypto
The simple formula to determine your capital gains for crypto, using crypto cost basis, is:
Gross proceeds - Cost Basis = Capital Gain/Loss.
In our example, Tim’s proceeds are $1,490. His cost basis is $1,030. Following this formula:
$1,490 - $1,030 = $460 Capital Gain.
The above is a straightforward transaction. As we’ll see, it can be more complex to determine your cost basis and depends on which cost basis method for crypto you use.
Why are there different cost basis methods for crypto and which one should you use?
The IRS allows taxpayers to choose different types of specific identification accounting, with different methods resulting in a different cost basis. Among the most popular cost basis methods for crypto are:
First in, first out (FIFO): Assets acquired first are sold first.
Last in, first out (LIFO): Assets acquired last are sold first.
Highest in, first out (HIFO): Highest price assets are sold first.
In some cases, the cost basis method for crypto you use will significantly impact your realized capital gains or losses.
Accounting method variations example
You have 3 BTC: 1 BTC was purchased in 2018 for $8,000, 1 was purchased for $50,000 in 2021, and 1 was purchased for $19,000 in 2022. In 2022, you sell 1 BTC for $23,000.
If you choose FIFO, your capital gain will be $15,000 ($23,000-$8,000).
If you choose LIFO, your capital gain will be $4,000 ($23,000-$19,000).
If you choose HIFO, you will have a capital loss of $27,000 ($23,000-$50,000).
TokenTax offers our proprietary Minimization accounting method that builds on HIFO and adjusts based on an individual’s tax rate to reduce crypto taxes as much as possible.
Why is crypto cost basis important for my crypto taxes?
Your crypto cost basis is the amount for which you originally acquired a given crypto asset in addition to any eligible associated fees. Knowing your cost basis is essential for proper tax filing. Without knowing your true cost basis, the entire proceeds of a given sale could be taxed as gains, resulting in a higher tax bill than necessary.
Unknown cost basis example
You sell $23k worth of BTC but do not know your cost basis.
Because you don’t know your cost basis for the BTC you’ve sold, the default cost basis will be $0. This means you’ll be taxed on the entire $23k of your sale.
This is one of the major reasons crypto users should keep complete records of their transaction history with portfolio trackers or crypto tax software like ours at TokenTax.
What you can do if don’t know your crypto cost basis
The surest way to determine your crypto’s cost basis is to keep an accurate and complete record of your crypto transactions across various exchanges and wallets.
If you encounter a situation in which you do not have precise information about your crypto transactions, you may be able to estimate your cost basis by referencing the historical price of your crypto at the time of acquisition.
When in doubt, let our experts at TokenTax assist you in determining your cost basis and the best cost basis method for crypto in your situation.
Which exchanges show crypto cost basis?
Exchanges will typically show your cost basis when possible. If you bought cryptocurrency through an exchange such as Binance US, you can usually determine your cost basis by reviewing your transaction history.
However, if you transferred your cryptocurrency onto an exchange from elsewhere, the exchange will not have information about your cost basis. It will simply register the value of the crypto when it was deposited onto the exchange.
This is why it’s essential to keep complete records of all your crypto transactions across platforms and to leverage crypto tax software like ours at TokenTax.
Get started with our crypto tax software
TokenTax understands the challenges crypto taxes pose. We provide a simplified approach, ensuring that your crypto filing is handled seamlessly, no matter how complex or numerous your crypto transactions may be.
Whether you're a casual investor, a professional trader, or represent a business engaged in crypto, our comprehensive crypto tax services and software prioritize compliance and provide you with peace of mind each and every tax season.
Say goodbye to manually tracking and calculating your crypto cost basis for every transaction. TokenTax effortlessly integrates with popular cryptocurrency exchanges and wallets, enabling you to import your data with ease and generate precise tax reports. Gone are the days of worrying about overlooked transactions or costly errors – we've got you covered.
Frequently asked questions
Here are answers to frequently asked questions about crypto cost basis, what is the preferred cost basis method for crypto, and how to calculate cost basis for crypto.
How does the IRS know your cost basis?
We recommend taxpayers assume that the IRS and similar agencies have full transparency into crypto activity. The IRS has increased efforts and developed partnerships to enforce crypto tax compliance. Tax evasion can result in penalties, fines, and criminal charges.
Because crypto operates on the blockchain, and exchanges require users to identify themselves, it is fairly easy for the IRS to analyze transactions and determine whether a taxpayer is raising red flags in terms of their tax reporting. The IRS can determine your cost basis the same way you do: by referring to transactions on the blockchain and doing simple math.
Are fees included in your cost basis?
Yes. In the majority of instances, your cost basis refers to the amount you spent to obtain your cryptocurrency, including the fair market value of a given crypto at time of receipt in addition to any fees incurred during the acquisition process.
Do exchanges show cost basis?
Sometimes but not always. If you bought your cryptocurrency through an exchange such as Coinbase, you can typically determine your cost basis by reviewing your exchange records.
However, if you transferred your cryptocurrency onto a given exchange from elsewhere, the exchange will not have information about your cost basis. This is why it’s essential to keep complete records of all your crypto transactions across platforms.
How much will my crypto be taxed?
Crypto in the US is considered property and taxed as a capital asset. Trading, selling, earning, and using crypto for payments are taxable events, with some taxed as capital gains and others as ordinary income. Transferring crypto from one wallet to another you control, or to an exchange account you own, is not a taxable event.
Crypto capital gains tax rates depend on income and holding period. Short-term gains are taxed at ordinary income rates (10-37%) while long-term gains are subject to preferential rates (0-20%) based on income.
International taxpayers can refer to our helpful country guides for more information about regions outside the US.
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