Introduction
Understanding crypto cost basis is crucial for accurate tax reporting. Whether you’re trading, staking, or earning crypto, knowing how to calculate cost basis correctly determines your capital gains or losses.
However, new IRS rules in 2025 will change how investors track and report their cost basis. This guide will walk you through crypto cost basis calculations, different accounting methods, and common tax issues that every investor should know.
What Is Cost Basis for Crypto?
Cost basis refers to the original purchase price of a cryptocurrency, adjusted for any fees. When you sell, trade, or dispose of crypto, the difference between the cost basis and the proceeds determines your capital gain or loss.
-
Cost Basis = Purchase Price + Fees
-
Proceeds = Amount Received When Sold or Traded
-
Capital Gain/Loss = Proceeds - Cost Basis
Changes to Cost Basis Rules in 2025
Starting January 1, 2025, the IRS is implementing new rules that will affect how crypto investors track and report their cost basis:
-
Form 1099-DA – Crypto exchanges will be required to report transactions to the IRS, making tax compliance stricter.
-
Wallet-by-Wallet Accounting – Investors must track cost basis for each wallet separately instead of using a universal method.
-
Stronger IRS Oversight – Self-transfers and cost basis reporting will be closely monitored, increasing the risk of IRS audits for non-compliance.
-
Backtracking Required – Investors must reconstruct prior tax years to ensure their cost basis is accurate before the IRS starts enforcing audits.
With these changes, it’s more important than ever to accurately track your crypto purchases, sales, and transfers.
How to Calculate Crypto Cost Basis
The basic formula for cost basis calculation is:
Total Purchase Price ÷ Number of Tokens = Cost Basis per Token
Example:
-
You purchase 10 AAVE tokens for $500.
-
Cost basis per token = $500 ÷ 10 = $50.
-
If you sell the AAVE tokens for $700, your capital gain = $700 - $500 = $200.
However, calculating crypto cost basis becomes complicated when dealing with:
Multiple purchases at different prices
Crypto-to-crypto trades
Transfers between wallets
DeFi activities like staking or liquidity pools
Each of these scenarios affects your tax liability and must be carefully tracked.
Crypto Cost Basis Methods
Investors can use different cost basis methods, but only some are allowed by the IRS. Choosing the right method can significantly impact your tax bill.
1. FIFO (First-In, First-Out) – IRS Approved
-
Assumes the earliest coins you purchased are the first ones sold.
-
Used by default if no other method is specified.
-
Can result in higher taxable gains if early purchases were at low prices.
Best for: Long-term investors who acquired crypto early at a low price.
2. Specific ID – IRS Approved
-
Tracks each individual coin’s purchase price and sale price.
-
Requires detailed records of transaction history.
-
Allows you to select which coins to sell first (potential tax benefits).
Best for: Investors who track their holdings carefully and want to minimize capital gains.
3. LIFO (Last-In, First-Out) – Not Recommended
-
Assumes the most recent purchases are the first ones sold.
-
Can reduce taxable gains in a rising market but is not IRS-approved.
Risk: The IRS may reject this method, leading to recalculations and penalties.
4. HIFO (Highest-In, First-Out) – Risky
-
Assumes the highest-cost coins are sold first.
-
Used to minimize gains and lower tax liability.
-
Requires Specific ID tracking and is not always IRS-approved.
Risk: Without proper records, the IRS will default to FIFO calculations.
5. Average Cost Basis – Not IRS-Approved
-
Calculates an average purchase price for all holdings.
-
Simplifies tracking but is not accepted by the IRS for crypto.
Not recommended for crypto tax reporting.
Pro Tip: FIFO and Specific ID are the only IRS-approved methods for reporting crypto cost basis.
Handling Crypto Cost Basis in Special Cases
1. Crypto-to-Crypto Trades
-
Exchanging Bitcoin for Ethereum is taxable, even if no cash is involved.
-
The sale of Bitcoin is reported as a disposal event, and the cost basis for Ethereum is set at the market price at the time of the swap.
2. Airdrops & Forks
-
Airdrops are taxable as income at the time of receipt.
-
Forked coins have a cost basis of their fair market value at the time they are received.
3. Staking Rewards & Mining
-
Staking and mining rewards are taxed as income when received.
-
Cost basis = Market price at the time of receipt.
4. Gifts & Inherited Crypto
-
Gifted crypto inherits the original owner’s cost basis.
-
Inherited crypto uses the fair market value at the date of the benefactor’s death.
IRS Audits and Crypto Cost Basis Verification
With the introduction of Form 1099-DA, the IRS will cross-check cost basis data from exchanges. If you fail to report accurately, you could face:
20% accuracy-related penalties
Failure-to-file penalties
Increased audit risk
How to Protect Yourself:
Keep detailed transaction records – Store receipts, exchange logs, and wallet history.
Use FIFO or Specific ID – Other methods may not be accepted.
Save documentation for 6 years – The IRS can audit past tax years.
Conclusion
Calculating crypto cost basis is essential for accurate tax reporting and avoiding IRS penalties. With new 2025 regulations, investors must track transactions carefully to comply with IRS rules.
At Block3 Finance, we specialize in crypto tax planning and reporting. If you need help with cost basis calculations, IRS compliance, or tax optimization, contact us today for expert guidance.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.