Crypto Cost Basis 101: What You Need to Know to File Taxes

You can’t pay your crypto taxes without knowing your cost basis. 

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. 

How is cryptocurrency taxed?

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. 
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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. 

To determine how much he’ll incur in capital gains, Scott can use the formula below. 

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.

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. 

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. 

What is per-wallet cost basis? 

Starting in the 2025 tax year, the IRS will require all taxpayers to use per-wallet tracking for cost basis. 

Consider the following example. 

The universal tracking method 

Before January 1, 2025, the IRS allowed the ‘Universal Tracking’ method. This essentially means that you treat all of your cryptocurrency as if it was from the same wallet or exchange — regardless of where you bought it and where you currently hold it. 

In the example above, Caleb’s cost basis for the 1 BTC sale using FIFO and Universal Tracking would be $20,000 — regardless of which exchange he sold his Bitcoin on. 

The ‘per wallet’ basis 

After January 1, 2025, all taxpayers will be required to use the ‘per wallet’ or ‘per account’ cost basis method. This means that sales of assets have to be matched with cost basis from buys or acquisitions of assets from the same account or wallet, hence ‘per wallet’. 

In the example above, Caleb’s cost basis would be $25,000, since he is selling from the ‘lot’ of BTC purchased on Exchange B. 

How do wallet transfers impact my cost basis? 

When you transfer your cryptocurrency from one wallet to another, your cost basis will transfer over as well. 

Once Per Wallet tracking requirements go into effect in the 2025 tax year, you can use an accounting method like FIFO to track the cost basis of any transferred cryptocurrency. 

Crypto tax software like CoinLedger can handle this for you automatically. 

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.

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. Some 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.
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