Crypto assets have been the subject of a lot of stress and confusion when it comes to taxes. Despite its ambiguous guidance, the tax agency sent thousands of letters to crypto traders and investors warning them to pay the tax that they owe or face fines and other penalties.
Let's take a look at how the crypto cost basis calculator is used and also some of the challenges associated with tracking cost basis—especially across different wallets and exchanges—as well as how to resolve them. But first, what is cost basis in crypto?
What is Cost Basis in Crypto?
In accounting, a cost basis is required to determine the profit we sell/exchange/spend on assets such as a share or a cryptocurrency.
When it comes to crypto, the cost basis is the price of the crypto token on the day you took ownership of it—regardless of the fact if you purchased it, received it as a gift, or were airdropped to you. While calculating the cost basis of the asset purchased, you also have to add in the transaction fees, brokerage commissions, and any other relevant charges paid when you purchased/sold it.
Now, let’s focus on the crypto cost basis calculations.
Simple Cost Basis Formula
To help with the answer to the question - How to calculate cost basis crypto? There is a simple crypto cost basis calculator: (Purchase Price + Fees) / Quantity
For example, suppose that you invested $150 into Bitcoin on April 1, 2020, for $6,537 with a 1.49% transaction fee. Your cost basis would be your total purchase price of $152.24 ($150 + 1.49%*150) divided by 0.023 ($150/$6,537) — or $6,619 per BTC.
The cost basis also depends on your accounting method:
- First in First Out (FIFO) - The cost basis for a sale is the cost basis of the earliest crypto that you acquired.
- Last in First Out (LIFO) - The cost basis for a sale is the cost basis of the last crypto that you acquired
- Highest in First Out (HIFO) - The cost basis for a sale is the cost basis of the most expensive crypto that you acquired.
- Actual Cost Basis - Each cryptocurrency is tracked and any sale is the sale of a specific coin.
For example, suppose that you're using FIFO and you acquired one Bitcoin in 2017 and two Bitcoins in 2018. If you sell two Bitcoins in 2019, you would use the cost basis for the 2017 purchase and one of the 2018 purchases.
The cost basis is important because it's used to calculate your taxable gains. The capital gain or loss of a position is the difference between your cost basis and sale price—or the fair market value at the time of the sale.
The cost basis is relatively straightforward for cash-to-crypto transactions, but crypto-to-crypto transactions are a different story and involve an extra step in the process.
Suppose that you sold one Bitcoin to acquire the equivalent value in Litecoin. The cost basis for Litecoin would be the fair market value of the Bitcoin at the time of sale in U.S. dollars plus any fees. For example, $6,500 plus a 1.49% transaction fee of $96.85 divided by 144—or, $45.88 per LTC.
You should keep a record of each transaction to ensure that you have the right cost basis on file. Otherwise, you may have to short through historical data to find the fair market value for different cryptocurrencies at different times. The good news is that you can use reputable price indexes in the process.
Initial Coin Offerings (ICOs)
The cost basis can also be complicated by the lack of liquidity. For example, how do you know the cost basis of a thinly traded initial coin offering (ICO)?
ICOs were initially designed to finance early-stage blockchain projects using a crowdfunding approach. Investors received tokens (e.g. vouchers) that they could use to pay for future services being developed by the issuing firm. These 'utility tokens' have been replaced by 'tokenized securities'.
While the cost basis for ICO investors is fairly straightforward, the cost basis for issuers is a little less certain. The IRS says that the issuance of 'utility tokens' for cash, crypto, or other property will be treated as the sale of property in which the issuer has a zero-cost basis.
Crypto Cost Basis Calculator For Airdrops & Forks
The cost basis of a hard fork or airdrop is zero since you're not paying anything to acquire the new cryptocurrency. When you sell the asset, you must pay tax on the entire amount.
Hard forks and airdrops also create an immediate tax obligation for the current tax year. In other words, you owe tax on the cost basis (or fair market value at the time of acquisition) of the new crypto in the current tax year. The only requirement is that you have technical control over the asset.
The good news is that there has been a lot of pushback among lawmakers for better solutions. After all, many crypto holders don't have an option when it comes to being on the receiving end of a hard fork or airdrop and they may not realize any cash gains if they don't sell it.
Crypto Cost Basis Calculator Across Multiple Wallets & Crypto Exchanges
Many exchanges prepare cost basis reports where possible, but they don't know how you originally acquired cryptocurrencies that you've imported into your account. If you use multiple wallets or exchanges, you cannot rely on exchanges to accurately report your cost basis figures.
Exchange cost basis calculator crypto don't work if you've:
- Bought or sold digital assets from elsewhere.
- Sent or received digital assets from elsewhere.
- Stored digital assets on an external device.
- Participated in an initial coin offering.
- Used different accounting methods than the exchange.
You must merge transactions from all of your exchanges and wallets into a single data set to determine the cost basis:
- Aggregate transactions from every exchange by exporting to CSV or other file formats that can be easily compared.
- Merge the transactions and sort them by date to understand when each transaction occurred.
- Determine the cost basis for each transaction based on your accounting method (FIFO, LIFO, HIFO, Actuals, etc.).
Incorporating Cost Basis Into Your Tax Strategy
Rather than moving to Puerto Rico to avoid paying taxes on crypto (there are caveats as well), there are a few tax strategies that you can use to minimize your long-term and short-term capital gains. Here are those strategies:
1. Compare Cost Basis Methods
There are several crypto tax software that makes it easy to change between different cost basis methods and we discussed they are FIFO, LIFO, HIFO, and Actual cost basis.
Each of these methods is IRS compliant and helps in determining the cost basis while calculating capital gains and losses. For instance, if you are selling your Ether in a bullish market, using a HIFO or LIFO will help reduce your taxes as your cost basis is likely to be higher. The IRS prefers the FIFO method because it lowers your cost basis and increases your taxes, which means more money for the IRS.
Unfortunately, you have to choose one cost basis method and be consistent. But taking a look at your portfolio before filing your crypto tax report can help you choose a method that lowers your liability as much as possible.
2. Assess Your Portfolio by December
Waiting for the last moment in April to choose a crypto tax strategy is quaint. To be effective for the tax year, you must carry out a strategy by December 31st. Assess your portfolio in December to determine the following:
- Assets that are in a loss position: This means that the cost basis of your digital assets is higher than the current price. You can offset any gains or lead to an overall net capital loss by selling those assets. The net loss is limited to $3,000 a year and excess loss can be carried forward.
- Assets held greater than one year: If you are planning to sell or trade an asset, waiting for the holding period to be greater than a year can be subject to a long-term tax rate, which can be financially beneficial. Selling crypto assets after holding them for less than a year leads to ordinary tax rates.
- Assets with a $0 cost basis: If you just hold your assets, it will not trigger a taxable event. This also makes sure that your taxes aren’t affected by a bullish market.
3. Include Your Transaction Fees
If you are transacting on Ethereum before its move to the ETH2.0, include your transaction fees on a cost basis. Especially for NFTs as minting them can result in thousands of dollars in gas fees.
Automating the Process With A Crypto Cost Basis Calculator
The process of manually aggregating, merging, and sorting data from multiple exchanges and wallets is tedious and time-consuming. Fortunately, crypto tax software can automate the process and help you avoid making costly mistakes.
ZenLedger simplifies the cost basis by stitching together your trading history and exporting based on the accounting method you select. After importing transactions from multiple sources, the platform automatically computes your capital gains and losses and pre-fills popular IRS forms, like Form 1040 Schedule D and 8949. ZenLedger crypto tax software provides an easy-to-use solution to find a cost basis for crypto traders who use multiple exchanges and wallets.
Final Thoughts On Cost Basis Calculator Crypto!
Cost basis is one of the most important concepts in crypto accounting and tax. While it can be fairly straightforward, there are some important considerations to keep in mind, particularly with airdrops, forks, ICOs, and other edge cases.
If you're using multiple exchanges, you must also aggregate transactions to ensure that you're properly calculating your cost basis. Crypto tax software, like ZenLedger, can simplify the process and ensure that you are accurately reporting data.
ZenLedger easily calculates your bitcoin taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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