How to Track Your Crypto Cost Basis Accurately
Accurate cost basis tracking is essential for calculating capital gains. This post explains FIFO, LIFO, and specific identification methods, plus tips for using software and handling transfers.
Your cost basis is the original value of an asset for tax purposes. For crypto, it determines your capital gain or loss when you sell. Accurate tracking is crucial to avoid overpaying or underpaying taxes.
Cost Basis Methods
FIFO (First In, First Out): The oldest units are sold first. This is the default method for many taxpayers and often results in higher short-term gains if you hold long-term. LIFO (Last In, First Out): The newest units are sold first. This can minimize gains if recent purchases are at a higher price. Specific Identification: You choose which units to sell. This requires detailed records and may be disallowed if you cannot identify specific units.
Tracking Tools
Use crypto tax software like CoinTracker, Koinly, or Cointelli to import transactions and calculate cost basis automatically. Manually track in a spreadsheet if you have few transactions.
Handling Transfers Between Wallets
Transfers between your own wallets do not change cost basis. Keep a record of the transfer date and amount to link the original purchase to the eventual sale.
What About Fees?
Trading fees are generally included in the cost basis. For example, if you buy $100 of Bitcoin and pay $1 fee, your cost basis is $101. When selling, you can also deduct transaction fees from the proceeds.
Example
You buy 1 BTC at $10,000 (cost basis $10,000). Later you buy another 1 BTC at $20,000. If you sell 1 BTC at $30,000 using FIFO, your gain is $20,000 ($30,000 - $10,000). Using LIFO, gain is $10,000 ($30,000 - $20,000).
Choose a method that works for you and apply it consistently. Consult a tax professional for complex situations.