It’s time that you start thinking about reaching out to your crypto accountant as tax season has arrived once again. One essential part of filing accurate crypto taxes is being able to figure out your cost basis as this helps you determine your capital gains and losses. If you do so accurately, using specific cost basis methods can even lead to an optimized crypto tax position. Let’s delve into cost basis in crypto and how it can play to your advantage.
Defining Cost Basis in Crypto
Your cost basis is simple; it’s the original price that you paid for your cryptocurrency asset, including any related fees that you paid when you took ownership. No matter how you took ownership, whether it was a gift, it was airdropped, or it was purchased, your cost basis will play into your crypto taxes. Although it might seem trivial to keep track of such information, knowing your cost basis can help you accurately determine your losses and gains of your cryptocurrency transactions.
One simple way to do this is to subtract your cost basis (original price) from the price at which you sold your asset to determine your gains or losses. Even though this sounds straightforward, in reality, there are many methods to choose from to help you calculate this number. Countries add to this complexity by having varying rules regarding when and which cost basis methods that you can use.
Example of Cost Basis in Crypto
It’s sometimes easiest to understand definitions with an example. If you purchase 0.5 BTC for 30,000 and you paid a 0.5% transaction fee ($150), your cost basis would be $30,150. If you choose to sell this later for $32,000, you’ll incur another 0.5% sell fee ($160), bringing your cost basis to $30,310. From there, you’ll want to calculate if you made a capital gain or loss by subtracting the cost basis from your sale price, which is $1,690 in this case. Along with the guidance of your crypto accountant, you’ll determine that you made $1,690, meaning you’ll need to pay capital gains tax.
Different Cost Basis Methods in Crypto
The way in which you calculate your cost basis will significantly impact your results. This means that your tax bill can vary significantly based on the method that you choose. In some instances, the difference can be thousands of dollars depending on the method that you use.
Here are some common examples of cost basis methods:
- First In, First Out (FIFO)
- Last In, First Out (LIFO)
- Average Cost Basics (ACB)
- Highest Cost, First Out (HIFO)
- Lowest Cost, First Out (LCFO)
- Specific Lot Identification (Spec ID)
Which Method Should You Use?
Determining the right method can be complicated and overwhelming, to say the least. In the United States, you’re allowed to choose between several methods while other countries such as the UK have specific rules about when you can use certain methods. One of the most commonly used methods in the US is FIFO as it allows investors to capitalize on long-term capital gains.
Reach Out to a Crypto Accountant for Help
It can be time-consuming to try to determine the right cost basis method to use. We highly recommend getting in touch with one of our crypto accountants to help you save time, money and energy this tax season. Please contact us at Founder’s CPA to take advantage of a free consultation!