Crypto cost basis is a term that can make or break your tax situation. It’s the original purchase price of your crypto, plus any fees you paid. If you want to stay on the right side of the IRS and not end up paying taxes on profits you didn’t actually make, understanding how to calculate this is crucial. So, let’s dive in.
Why You Should Care About Cost Basis in Crypto
Knowing your cost basis in crypto is essential for tax filing. If you don't know your cost basis, you could be taxed on the entire sale. For example, if you sell $23,000 worth of BTC but do not know your cost basis, the default cost basis will be $0, meaning you'll be taxed on the entire $23,000 of your sale. Not knowing could cost you, and knowing could save you.
Calculating Your Crypto Cost Basis
Calculating your crypto cost basis is not rocket science. You need to figure out the Fair Market Value (FMV) of the crypto at the time you bought it, add any transaction fees, and boom, that's your cost basis.
For example, if you bought 1 ETH for $1,000 and paid a $30 gas fee, your cost basis is $1,030.
Different Cost Basis Methods
The IRS lets you choose how you want to calculate your cost basis, and this can have different tax implications. Some popular methods include:
- FIFO: Sell the oldest coins first.
- LIFO: Sell the newest coins first.
- HIFO: Sell the most expensive coins first.
- ACB: Average cost of all coins.
Each method has pros and cons, and you’ll want to think about which one aligns with your financial goals.
Tools to Help You Out
You’re going to want to keep great records of your crypto transactions. There are tools out there that can help you do this, like:
- Kryptos
- Koinly
- CryptoTaxCalculator
- CoinTracking
- Bitwave
These tools can help you manage your crypto cost basis and make sure you're not leaving money on the table come tax time.
