You can’t pay your crypto taxes without knowing your cost basis. In this guide, we’ll explain everything cryptocurrency investors need to understand about cost basis, including how to calculate it and track it across wallets and exchanges.
How Is Cryptocurrency Taxed?
Cryptocurrency is treated as property by the IRS, meaning it’s subject to capital gains tax and income tax. Key disposal events triggering taxable gains/losses include:
- Selling crypto for fiat currency
- Trading one crypto for another
- Using crypto to purchase goods/services
👉 Learn more about crypto tax rules
What Is Cost Basis?
Your cost basis is the original purchase price of your cryptocurrency, including any associated fees. It’s essential for calculating capital gains/losses.
How to Calculate Cost Basis
| Scenario | Calculation |
|----------|------------|
| Buying ETH | Purchase price + transaction fees |
| Example: Buy $1,000 ETH + $30 fee | $1,030 cost basis |
Proceeds Calculation
Proceeds = Sale price - disposal fees
Example: Sell $2,000 ETH - $50 fee = $1,950 proceeds
Why Cost Basis Matters
Capital Gain = Proceeds - Cost Basis
Example:
- Buy BTC for $1,500 → Sell for $2,000
- Gain: **$500** ($2,000 - $1,500)
Cost Basis Methods
If you acquire crypto at different prices, you’ll need a method to determine which lot was sold:
| Method | Description | Best For |
|--------|-------------|----------|
| FIFO | First-in, first-out | Default (IRS-compliant) |
| LIFO | Last-in, first-out | Reducing short-term gains |
| HIFO | Highest-cost, first-out | Minimizing tax liability |
Example:
- Buy 1 BTC at $30K, $40K, $38K → Sell 1 BTC at $45K
- FIFO gain: $15K | **LIFO gain**: $7K | HIFO gain: $5K
Per-Wallet Cost Basis (2025 IRS Rule)
Starting in 2025, the IRS requires per-wallet/account tracking:
- Universal Tracking (Pre-2025): All holdings pooled together.
- Per-Wallet (2025+): Sales must match buys from the same wallet.
Example:
- Buy BTC on Exchange A ($20K) and Exchange B ($25K) → Sell on Exchange B
- 2024 Cost Basis: $20K (FIFO)
- 2025 Cost Basis: $25K (Exchange B only)
Special Scenarios
Transfers Between Wallets
- Cost basis carries over.
- 2025 Rule: FIFO applies to transferred lots.
Crypto-to-Crypto Trades
- Cost basis = FMV at time of trade + fees.
Airdrops/Staking/Mining
- Cost basis = FMV at time of receipt.
Gifts
- Cost basis = Original gifter’s basis (if lower than FMV at gift date).
Tracking Cost Basis
Exchanges (e.g., Coinbase) provide cost basis data, but transfers complicate records. Use:
- Historical price tools for unknown basis.
- Crypto tax software (e.g., CoinLedger) to automate tracking.
FAQs
1. What if I don’t know my cost basis?
Estimate using historical prices or treat as $0 (entire sale = gain).
2. Are gas fees included in cost basis?
Yes. Add fees to acquisition/disposal costs.
3. Can I change my cost basis method yearly?
Possible but risky. Consult a tax pro to avoid IRS issues.
4. How does the IRS verify cost basis?
Via 1099 forms (often incomplete) and future exchange reporting (2025+).
5. What’s the best cost basis method for taxes?
HIFO minimizes gains but requires meticulous records.
Simplify Your Crypto Taxes
Stop manually tracking cost basis! Use CoinLedger to:
- Sync wallets/exchanges.
- Auto-calculate gains/losses.
- Generate IRS-ready reports.