Cost basis is the total fair market value, or amount paid for, of an asset at the time you received it. When you sell or trade an asset, your original cost basis determines the capital gains or loss.
Options for Tracking Cost Basis in CoinTracker
Universal Tracking Method
Under the universal tracking method, all transactions for a particular coin across various wallets are combined into a single queue. This means the cost basis used when selling a coin may originate from any connected wallet, irrespective of where the sale occurs.
Per-Wallet Tracking Method
The per-wallet method maintains separate queues for each coin within each specific wallet. Consequently, the cost basis for a coin sold from a particular wallet will exclusively come from the same wallet, ensuring clarity and compliance with certain regulatory frameworks.
Examples of Tracking Methods
Universal Tracking Example
Scenario: Selling Bitcoin using FIFO (First In, First Out)
- 1 BTC sold from a purchase on May 1, 2012, results in a long-term capital gain of $900.
- 2 BTC sold from a purchase on May 10, 2016, yields a long-term capital gain of $3,000.
- Total Long-Term Capital Gains: $3,900
Per-Wallet Tracking
Scenario: Selling Bitcoin using FIFO (First In, First Out)
- A sale of 1 BTC corresponds to a short-term gain of $500.
- A subsequent sale of 2 BTC aligns with long-term gains totaling $3,400.
- Total Long-Term Capital Gain: $3,400
- Total Short-Term Capital Gain: $500
Reporting Requirements Under the Infrastructure Bill
The Infrastructure Bill (Sec. 80603 on pg. 127) mandates that U.S. digital asset brokers report cryptocurrency gains and losses, similar to securities brokers. These reports, starting potentially in 2024 for the 2023 tax year, will be facilitated through a new IRS Form 1099-DA.
Implications of Non-Compliance with Per-Wallet Tracking
Non-compliance can lead to discrepancies with IRS reports and potentially prompt tax authority inquiries. CoinTracker defaults to per-wallet tracking for U.S. users to align with anticipated regulatory changes.
Can I switch from per-wallet to universal tracking?
While the universal tracking method is available via settings on CoinTracker, it is recommended to maintain per-wallet tracking for accuracy and compliance with upcoming regulations. Please consult with a tax advisor.
Why apply per-wallet tracking retroactively?
Switching to per-wallet tracking retroactively helps reconcile discrepancies in previous transactions and aligns past and future reporting for consistency with IRS expectations.
How does the tracking method affect gains over time?
“Universal” or “per-wallet” tracking can affect when you experience gains or losses, which could be sooner or later based on where you hold and dispose of your assets. The tracking method does not change your overall capital gains when aggregated across tax years.
In some cases, the switch to "per-wallet" could affect whether a capital gain is considered short-term or long-term.