What is a cost basis accounting method?
When you buy the same crypto asset on multiple occasions, you create multiple cost basis lots for that asset. When you trade or sell that same crypto, your profit or loss depends on which of these cost basis lots are used up in the disposal. Cost basis accounting method determines which assets will be disposed of first, and different methods can change how much you owe in taxes.
The IRS, in their October 9, 2019, virtual currency FAQs, allows for the use of both the First-In-First-Out (FIFO) and Specific Identification methods for virtual currency, applying these guidelines retroactively. While Specific Identification offers a precise way to identify the asset being sold, it's notable that not all platforms offer this method at an individual unit level, including CoinTracker. However, we do support alternatives such as Highest-In-First-Out (HIFO) and Last-In-First-Out (LIFO), which are subsets of Specific Identification.
Learn more about cost basis with our Understanding Cost Basis guide. You can also see what our tax experts say about the best cost basis method in Ways to Lower Your Crypto Tax Bill: Which Cost Basis Method is Best?
What are my options for calculating cost basis?
Specific ID
- Definition: Allows the identification of the exact coin being sold at the time of transaction, whether ad-hoc or according to a pattern like HIFO or LIFO.
- IRS Requirements: Detailed in FAQ 40, requiring records that match Specific ID criteria.
- Note: CoinTracker supports HIFO and LIFO under Specific ID but does not offer unit-by-unit identification. If you would like to request this feature, please upvote this post on our feedback forum.
HIFO (Highest In, First Out)
- Definition: Assets bought at the highest price will be sold first.
- Benefit: Minimizes taxable gains by selling the most expensive assets first.
- Note: CoinTracker sets accounts to HIFO by default, as it tends to lower the tax bill.
FIFO (First In, First Out)
- Definition: Assets sold in the order they were acquired.
- Benefit: Considered the simplest and most conservative method.
LIFO (Last In, First Out)
- Definition: Assets purchased most recently will be sold first.
- Benefit: Beneficial in certain tax scenarios by focusing on assets with potentially higher cost bases due to recent purchase prices.
International Cost Basis Options
- Australia: Requires specific identification when possible; otherwise, FIFO is used.
- Canada: Utilizes Adjusted Cost Base (ACB) based on CRA requirements, with capital gains reported on Schedule 3 Form. Learn more about ACB HERE.
- Germany: Adheres to similar rules as the US (see above).
- United Kingdom: Employs share matching.
Changing Your Cost Basis Method
You can change your cost basis method in Settings. Changing your cost basis method setting will change the method for all years unless you have an Ultra plan, which will allow you to set a different method for each tax year. For more info, check out our guide on How to set cost basis method by tax year. For tailored advice on which method aligns with personal preferences or regulatory requirements, we recommend consulting a tax professional.
Disclaimer: CoinTracker is provided for informational purposes only. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. For financial, tax, or legal advice please consult your own professional. The information on CoinTracker is subject to change without notice. All information is provided "as is." CoinTracker disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Please see our full disclaimer.