Cost basis is a key concept in finance, it’s especially relevant for investments and taxes. Learn more about what it is, how it's calculated, and the methods to optimize tax outcomes.
The basics of cost basis
- The cost basis of an asset is the value at the time it is acquired, including the purchase price and any associated costs, such as fees.
- Cost basis is crucial for determining tax liability. When you sell a capital asset, the difference between the sale price (proceeds) and the cost basis will determine whether you have a capital gain or loss.
- The tax formula: Proceeds - cost basis = capital gains (or losses)
Calculating cost basis
Buying crypto with cash
Calculating the cost basis for crypto bought with cash is simple. It’s based on the fair market value (FMV) of the cryptocurrency at the time of purchase, plus any transaction fees. These fees are added to the purchase price to determine the total cost basis.
Example
- Transaction: Purchase of 1 BTC for $1,000.
- Transaction fee: $25.
- Cost basis: The cost basis for this BTC transaction is $1,000 (purchase price) + $25 (transaction fee) = $1,025.
Trading crypto for crypto
Trading one cryptocurrency for another can complicate cost basis calculations due to market volatility. We offer tools to help balance outgoing and incoming assets in a transaction for better accuracy.
For these types of transactions, the cost basis is determined based on the FMV of the acquired crypto on the transaction day, which also serves as the proceeds for the exchanged crypto.
Example
- Transaction: Trade of 100 USDC for 1 LINK.
- Misconception: The cost basis of LINK is $100, equal to the value of the USDC traded.
- Reality: The cost basis of LINK is determined by its FMV at the time of the trade, not the value of the USDC. If 1 LINK’s FMV is $105 at the time of the transaction, that becomes the cost basis. This could result in a capital gain on the USDC if its value has increased since it was acquired.
Available methods for calculating cost basis
The cost basis method determines the order in which lots are used in the event of a trade or sale, affecting capital gains or losses. CoinTracker supports these methods:
- FIFO (First In, First Out)
- HIFO (Highest In, First Out)
- LIFO (Last In, First Out)