Understanding Your Cost Basis

Cost Basis: The Key to Cryptocurrency Tax Calculation

Understanding Your Cost Basis

Cost basis, the foundation of cryptocurrency tax calculation, represents the initial amount invested to acquire a digital asset. It determines the amount of capital gain or loss realized when the asset is sold or exchanged. For example, if you bought 0.5 BTC for $30,000 with a $150 trading fee, your cost basis would be $30,150. Similarly, if you purchased 10 AAVE tokens for $500, your cost basis would be $50 per token.

Navigating Cryptocurrency's Complexity

However, navigating the complexities of cryptocurrency taxation can be challenging. The decentralized nature of the asset class and its fluctuating values pose unique challenges for investors and tax authorities alike. Understanding cost basis is crucial for accurate tax reporting and maximizing potential tax savings.

Cost Basis Calculation Methods

Several cost basis calculation methods exist, each with its own implications for tax liability. Common methods include:

• Specific Identification Method: Identifying the specific coins or tokens purchased and sold, tracking their individual cost basis.
• First-In, First-Out (FIFO) Method: Assuming that the first coins or tokens purchased are the first sold, resulting in a higher cost basis at sale.
• Last-In, First-Out (LIFO) Method: Assuming that the most recently purchased coins or tokens are the first sold, leading to a lower cost basis at sale.