Cost basis is the number the IRS subtracts from your sale proceeds to figure out a crypto gain or loss. Because most people buy the same coin many times at different prices, deciding which purchase a sale draws from can swing the tax bill substantially. This guide covers how basis works and the accounting methods you can use; it is general education, not tax advice.
What cost basis includes
Cost basis is generally what you paid to acquire a coin, including trading fees and commissions. When you dispose of that coin, your capital gain or loss is the sale proceeds minus this basis. For crypto received as income, such as staking rewards, the basis is the fair-market value that was already taxed when you received it. Accurate basis is what prevents you from paying tax on money you never actually gained.
Choosing an accounting method
When you sell part of a stack bought at different prices, an accounting method decides which lots are sold first. FIFO, or first-in first-out, sells your oldest coins first and is the common default. Specific identification lets you choose exactly which lot to sell if you keep adequate records, and HIFO, or highest-in first-out, is a specific-identification approach that sells your most expensive coins first to minimize gains. The method you use can materially change taxable gains in a given year.
New per-wallet tracking rules
Historically many people tracked basis across all their holdings as one universal pool. Beginning in 2025, IRS guidance requires taxpayers to track basis on a per-wallet or per-account basis rather than universally. In practice this means each exchange account or wallet keeps its own set of lots, and you allocate existing basis accordingly. This change makes clean records and consistent method choices more important than ever.
Keeping records that survive an audit
Exchanges frequently lack your full history, especially once you transfer coins between platforms or into self-custody. You should keep the date acquired, amount, price, fees, and the date and value of every disposal. Many people use crypto tax software that imports transactions and applies a consistent method automatically. Good records let you defend your chosen method and avoid overpaying because basis was unknown.
Say you bought 1 BTC at 20,000 dollars and later another at 60,000 dollars, then sold 1 BTC for 65,000 dollars. Under FIFO you sell the 20,000 dollar coin for a 45,000 dollar gain, but using specific identification to sell the 60,000 dollar coin gives only a 5,000 dollar gain. Same sale, very different tax, depending on the lot you can document.
Key takeaways
- Cost basis is what you paid, including fees, and it reduces your taxable gain.
- FIFO sells oldest coins first; specific identification and HIFO can lower gains if documented.
- Your method choice can significantly change the tax you owe in a year.
- From 2025, basis must generally be tracked per wallet or account, not as one universal pool.
- Detailed records are essential because exchanges often lack your full transaction history.
Common mistakes
- Recording zero basis because you lost track of the original purchase, which inflates the taxable gain.
- Switching methods inconsistently or without adequate records to support specific identification.
- Ignoring the shift to per-wallet basis tracking that applies from 2025 onward.
FAQ
What if I do not know my cost basis?
If you cannot document what you paid, the IRS may treat the basis as zero, meaning the entire proceeds could be taxed, so reconstructing records is worthwhile.
Which method is best?
It depends on your situation; HIFO or specific identification often reduces near-term gains, but you must keep records and apply the method consistently, so many people consult a tax professional.