How to Determine the Cost Basis of Cryptocurrencies
Understanding Cost Basis
Cost basis refers to the value of an investment when acquired, which is used to determine gains or losses when the investment is sold or disposed of. For cryptocurrencies, it's essential to establish a clear cost basis to accurately track and report taxable events.Cost Basis Methods
There are several methods to calculate the cost basis of cryptocurrencies:Specific Identification: Investors identify the specific coins sold and use the acquisition cost of those coins as the cost basis.
First-In, First-Out (FIFO): The oldest acquired coins are considered to be sold first, meaning the cost basis of the first coins purchased will be used.
Last-In, First-Out (LIFO): The most recently acquired coins are considered to be sold first, resulting in the cost basis of the last coins purchased being used.
Weighted Average Cost: The total cost of all acquired coins is divided by the total number of coins owned to determine the average cost per coin.
Example Calculations
Specific Identification: If Tim purchased 10 AAVE tokens for a total of $500, then each token has a cost basis of $50. If he later sells 5 of these tokens, the cost basis of the sold tokens will be $250.
FIFO: If Tim first purchased 5 AAVE tokens for $250 and then purchased another 5 tokens for $250, when he sells 5 tokens, the cost basis will be $250, representing the first 5 tokens purchased.
LIFO: Using the same example, if Tim sells 5 tokens, the cost basis will be $250, representing the most recent 5 tokens purchased.
Weighted Average Cost: If Tim purchased 5 AAVE tokens at $250 and then purchased another 5 tokens at $300, his average cost basis per token would be $275. If he sells 5 tokens, the cost basis would be $1,375 (5 tokens x $275 per token).
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