"Cost basis" is the original value or purchase price of an asset or investment for tax purposes (in our case, cryptocurrency is the asset). Were you an early adopter and bought 1 BTC for $2,000 before the price skyrocketed? Then your cost basis for that purchase is $3,000.
Cost basis is both a critical part of calculating your crypto-taxes, and one that is often overlooked or misunderstood. We hope this article addresses all of that for you!
Included in this article you will find:
- What makes cost basis so important?
- How is cost basis is calculated?
- What is a cost basis pool?
- How do I review the cost basis of my transactions?
- Which transactions do I need in my TaxBit account?
- What does it mean if I have missing cost basis?
- What tax methods can I use to calculate my cryptocurrency gains/losses?
What makes cost basis so important?
Because crypto is considered a "capital asset", it's taxed based on the difference in value between the moment that you acquire an asset, and the moment that you dispose of an asset. In order to determine any potential gains or losses you made, we need to know the asset value at the time of purchase, i.e. cost basis. Cost basis is established when buying an asset, receiving it in a trade (crypto to crypto), from mining, staking, airdrop, hard fork, interest earned, rewards, or as a gift.
In short, without knowing what your cost basis is, TaxBit can't produce an accurate tax form.
How is cost basis used for tax purposes?
As mentioned in the introduction, cryptocurrency is treated as a capital asset. As such, you're taxed not upon acquiring an asset, but rather when you dispose of an asset (sell it, trade it away etc.). The amount that you're taxed on is any gains in value between the acquisition date and disposal date.
Example: You buy 1 BTC on January 1st for $10,000. Two weeks later, you sell that 1 BTC for $12,000. You've realized a gain of $2,000. Your cost basis was $10,000, your disposal value was $12,000.
- FAQ: If I've made multiple purchases of an asset before disposing of any, how does TaxBit know which assets to link together? That will depend on which Accounting Method you've set your account to. See this blog article for more details.
What is a "cost basis pool"?
When you accumulate assets over time, TaxBit creates a pool of assets that are available based on the date they were acquired, and the USD amount paid to acquire them. Depending on your accounting method, (FIFO or Specific ID, you can read more about those HERE) TaxBit’s tax engine will refer to the cost basis pool for the best available asset to fit your tax accounting method.
How can I see the cost basis of my trades?
If you click on one of your trades, or sales on the My Transactions page in your TaxBit account, you can click on the + to see the transaction details that established your cost basis. In the below example, you can see the expanded grey section contains all of the cost basis information for one trade. Some trades will have all of their cost basis information in one transaction, and some will be broken up into many transactions, it just depends on what is available in the cost basis pool for a given asset.
- This is a summary of the transaction, you can see exactly what was sent (on the left), and what was received (on the right).
- This is the total value of what was sent, at the moment the transaction took place. This also established the cost basis for the received asset, if it’s a trade.
- This column identifies the date of the transaction used to establish cost basis
- This column identifies how much of the asset that was acquired is being used to establish the cost basis.
- This column identifies the value in USD that is being used as the cost basis for each of the assets acquired in each transaction
- This is the sum of the cost basis, which is being referenced to determine the final gains/losses the transaction resulted in.