What Is Cost Basis?
Cost basis is what you paid for an asset, purchase price plus acquisition fees, and it is the number every future tax calculation stands on: sale proceeds minus basis equals your taxable gain or deductible loss. In crypto, where people trade often, move coins between wallets, and earn tokens five different ways, basis tracking is where tax season goes to die.
How It Actually Works
- Buy 1 ETH for $3,000 plus a $30 fee: basis $3,030. Sell later for $4,000: taxable gain $970. Every disposal, sales, swaps, spending, needs a basis matched to it; the mechanics live in my tax guide.
- Lots matter. Buying at many prices creates many lots; which lot you sell determines the gain. U.S. rules default to first-in-first-out unless you specifically identify lots, and choosing lots deliberately is legal tax planning; see tax-loss harvesting.
- The rules tightened. Starting with 2025, U.S. basis tracking is required wallet-by-wallet and account-by-account rather than pooled across everything, and brokers now report on 1099-DA, which makes your records and their records reconcilable, or embarrassingly not.
- Earned crypto, staking rewards, airdrops, payment for work, takes as its basis the market value already taxed as income at receipt.
Risks and Common Mistakes
- No records means the IRS can treat basis as zero, taxing your entire proceeds. Export transaction history regularly; exchanges die and take their records with them.
- Forgetting that wallet transfers are not sales but their fees and lot identity still need tracking across the move.
- Ignoring swap basis: every token-for-token trade sets a new basis at market value while disposing of the old lot. Memecoin churners generate hundreds of these; see the warning on my Memecoins page.
When It Matters
Every sale, swap, and spend, and retroactively the day you finally file. Start the spreadsheet or software now; reconstruction years later costs more than the tax.
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