Cost basis is what you originally paid for an asset, including any fees. When you sell, your taxable gain or loss equals the sale price minus your cost basis. If you bought 1 ETH at $2,000 (plus $5 exchange fee) and sold at $3,000, your cost basis is $2,005 and your capital gain is $995. Tracking cost basis accurately is essential for correct tax reporting.
What Is Cost Basis (General Concept)?
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The short version
Cost basis is your purchase receipt. It tells the tax authority what you paid, so they can calculate your profit. If you bought low and sold high, you owe tax on the difference. If you sold below your cost basis, you have a loss (which can offset other gains). Without accurate cost basis records, you cannot calculate what you owe.
How It Works
How cost basis is determined: (1) Purchase: basis = price paid + transaction fees. Buy 2 ETH at $3,000 each + $10 fee = $6,010 total basis ($3,005 per ETH). (2) Received as income (mining, staking, airdrop): basis = fair market value at time of receipt. Receive 0.1 ETH as staking reward when ETH = $3,000: basis = $300. (3) Gifted: basis is the donor's original cost basis (carryover basis in US). (4) Inherited: basis is typically fair market value at date of death (stepped-up basis in US). Complications: when you buy the same token at different prices over time (multiple lots), you need a method to determine WHICH lot you are selling. That is where FIFO, LIFO, and HIFO come in. DeFi complexity: wrapping, LP deposits, yield farming rewards, and complex multi-step transactions can make basis tracking extremely difficult. Crypto tax software (Koinly, CoinTracker, TokenTax) helps automate this.
Tracking basis across multiple purchases and a partial sale
January: buy 1 ETH at $2,000. Basis: $2,000. April: buy 0.5 ETH at $3,000. Basis: $1,500. July: receive 0.1 ETH from staking (ETH at $2,800). Basis: $280. Total holdings: 1.6 ETH. Total basis: $3,780. Average basis per ETH: $2,362.50. September: sell 0.8 ETH at $3,500 each = $2,800 proceeds. Using FIFO: you sell the first 0.8 ETH from your January lot. Basis for those 0.8 ETH: 0.8 x $2,000 = $1,600. Capital gain: $2,800 - $1,600 = $1,200. Using HIFO: you sell the highest-cost 0.8 ETH first (0.5 from April at $3,000 + 0.1 from staking at $2,800 + 0.2 from January at $2,000). Basis: $1,500 + $280 + $400 = $2,180. Capital gain: $2,800 - $2,180 = $620. Different methods, different tax outcomes. Choose the method your jurisdiction allows that minimizes your liability.
What People Get Wrong
Exchanges track cost basis for you perfectly
Exchanges track what happens on their platform only. If you bought on Coinbase and transferred to Kraken, Kraken has no idea what you originally paid. Moving between exchanges, wallets, and DeFi breaks basis tracking. You are responsible for maintaining records across all platforms.
Cost basis is always what you paid in fiat
If you bought ETH with BTC (crypto-to-crypto), your ETH cost basis is the fair market value of the BTC you spent at the time of the swap. This is also a taxable disposal of BTC (with its own gain/loss calculation). Every crypto-to-crypto trade creates both a disposal and an acquisition.
Gas fees do not affect cost basis
Gas fees paid to acquire an asset can be added to cost basis (reducing future gains). Gas fees paid to sell/dispose can be deducted from proceeds. Gas fees for non-acquisition/non-disposal transactions (failed transactions, contract interactions) may be deductible as transaction expenses depending on jurisdiction and circumstances.
Keep Reading
Sources & Further Reading
- IRS Publication 544 (Dispositions)
IRS guidance on cost basis calculation for asset sales
- Koinly
Crypto tax software that automatically calculates cost basis across wallets and exchanges
Questions People Also Ask
- What if I do not know my original cost basis?
- You must make a reasonable effort to determine it. Options: check exchange transaction history, email confirmations, bank statements from the purchase date, or blockchain records correlated with historical price data. If truly unknown, some tax preparers advise using $0 basis (conservative, maximizes gain reported) or a defensible estimated price from the acquisition date.
- Does DeFi make cost basis tracking harder?
- Significantly. LP deposits, yield farming, rebasing tokens, airdrops, and complex multi-contract interactions create cost basis events that are difficult to track manually. Dedicated crypto tax software that reads on-chain transaction history (Koinly, CoinTracker, TokenTax, CryptoTaxCalculator) is practically necessary for active DeFi users.
- Can I use average cost basis for crypto?
- Allowed in some jurisdictions (UK allows pooling which is a form of average cost). In the US, average cost is allowed for mutual funds but the IRS has not explicitly authorized it for crypto. Most US tax preparers use specific identification (choosing FIFO, LIFO, or HIFO) per lot. Check your jurisdiction's specific rules.