What is the cost basis method for crypto taxes?

The cost basis method determines how you calculate your gain or loss when you sell or dispose of cryptocurrency. Choosing the right method can significantly impact your tax liability, and it is important to apply your chosen method consistently.

Specific Identification is the most flexible method and often produces the best tax results. Under this method, you specifically identify which units of cryptocurrency you are selling. For example, if you bought 1 BTC at $30,000 and another 1 BTC at $50,000, when you sell 1 BTC, you choose which lot to sell. To minimize current-year gains, you would sell the $50,000 lot first (higher basis, lower gain). This requires detailed records linking each acquisition to each disposal.

FIFO (First In, First Out) assumes you sell your oldest units first. If you bought BTC at $30,000 in January and $50,000 in June, a sale would use the $30,000 basis first. FIFO is the IRS default method if you do not specify another approach. In a rising market, FIFO tends to produce larger gains.

LIFO (Last In, First Out) assumes you sell your most recently acquired units first. This typically produces smaller gains in a rising market since your most recent (and usually highest-cost) purchases are sold first. However, the IRS has not officially sanctioned LIFO for cryptocurrency, so its use carries some risk.

HIFO (Highest In, First Out) sells the highest-cost units first, minimizing gains. This is essentially a variation of specific identification that always selects the highest-cost lot. Many crypto tax software platforms support HIFO.

Average Cost is used for mutual fund shares and was recently approved for certain crypto transactions beginning in 2025. Under this method, your basis per unit is the average of all units you hold.

Practical tips: use crypto tax software (like CoinTracker, Koinly, or TaxBit) to automatically track cost basis across exchanges; maintain records of every acquisition including date, amount, and cost; account for transaction fees as part of your cost basis; and be consistent with your chosen method. If you switch methods, apply the new method only to future transactions.

At Zenith Financial, we can analyze which cost basis method produces the most favorable tax result for your specific portfolio.