Calculating your cryptocurrency cost basis is essential for accurate tax reporting. Whether you're a seasoned investor or new to crypto, understanding cost basis methods ensures compliance and optimizes your tax strategy. This guide covers everything from fundamental calculations to 2025 regulatory changes.
What Is Cost Basis for Crypto?
Cost basis refers to the original purchase price of a cryptocurrency asset, used to determine capital gains or losses upon disposal. It includes:
- Purchase price (amount paid to acquire the crypto).
- Fees (transaction/gas fees added to the basis).
Cost Basis vs. Proceeds
| Term | Definition |
|---------------|--------------------------------------------|
| Cost Basis | Initial investment amount per token. |
| Proceeds | Amount received from selling/trading. |
Taxable Gain/Loss = Proceeds – Cost Basis
Changes to Crypto Cost Basis Rules in 2025
Starting January 2025, new IRS regulations take effect:
- Form 1099-DA: Exchanges must report transactions via this new form.
- Wallet-by-Wallet Accounting: Universal accounting is phased out; investors must track cost basis per wallet.
- Transfer Reporting: Brokers will eventually share cost basis data (like traditional securities), but self-tracking remains critical for now.
- Catch-Up Period: Address prior-year filings before stricter enforcement begins.
👉 Stay updated on 2025 crypto tax changes here
How to Calculate Crypto Cost Basis
Basic Formula
Cost Basis per Token = Total Purchase Price ÷ Number of Tokens
Example: Buy 10 AAVE for $500 → $500 ÷ 10 = $50 per token.
Challenges
- Complex Transactions: DeFi swaps, airdrops, and transfers complicate tracing.
- Missing Data: Defunct exchanges or lost records require reconstructive efforts.
Steps:
- Download full transaction history from all wallets/exchanges.
- Combine data into a single ledger (buys/sells/transfers).
- Trace each token’s lifecycle (acquisition date, sale date, proceeds).
Tip: Use crypto tax software or hire a professional for accuracy.
Approved Crypto Cost Basis Methods
| Method | Description | IRS Compliant? |
|-------------|--------------------------------------------|---------------|
| FIFO | First tokens bought are first sold. | ✅ Yes |
| Specific ID | Track individual token costs. | ✅ Yes |
| LIFO | Last tokens bought are first sold. | ❌ No |
| HIFO | Highest-cost tokens sold first. | ❌ No |
| Average Cost | Use an averaged price. | ❌ No |
Pro Tip: FIFO is default if Specific ID isn’t documented.
Cost Basis for Common Transactions
1. Airdrops
- Basis = Fair market value (FMV) at receipt.
- Example: Receive 100 XYZ tokens worth $1 each → **$100 basis**.
2. Crypto-to-Crypto Swaps
- Treated as a sale (old token) + purchase (new token).
- Example: Swap 1 ETH ($2,000) for 2,000 USDC → **$2,000 basis for USDC**.
3. Inherited/Gifted Crypto
- Inherited: Basis = FMV on date of death.
- Gifted: Inherit giver’s original basis.
👉 Learn more about crypto tax strategies
FAQ
Q: Can I set my cost basis to zero?
A: Only in rare cases (e.g., untraceable airdrops). Consult a tax pro.
Q: How does the IRS verify cost basis?
A: Through transaction audits. Maintain records for 6+ years.
Q: What if I’m missing cost basis data?
A: Reconstruct using exchange histories or seek professional help.
Need Help?
Navigating crypto taxes is complex. Gordon Law Group’s experts specialize in:
- Cost basis calculations.
- IRS audit defense.
- Tax minimization strategies.
👉 Contact us for a consultation
Updated for 2025 regulations. Always consult a tax professional for personalized advice.