As the U.S. tax season is now here, this is probably one of the most common questions I see. Let's break it down.
What is Cost Basis?
Your cost basis is the total cost of acquiring your crypto. This includes the fair market value at the time of receipt and any associated fees.
Calculating Cost Basis:
To find your cost basis, sum up what you paid for your crypto, including any fees. It's usually the fair market value at the time you got it plus any acquisition fees.
What About Proceeds?
Proceeds are what you get when you sell your crypto. This is typically the fair market value at the time of sale, minus any relevant fees.
Cost Basis Methods:
The IRS currently recognizes two primary cost basis methods: FIFO (First-In, First-Out) Specific ID A cost basis calculator may let you choose LIFO or HIFO instead, but this might cause trouble if you ever become the target of a crypto tax audit.
- Can your cost basis be zero? Usually, it's not allowed. Exceptions are rare and typically apply to situations like receiving an unusual airdrop.
- What about hard forked crypto? If you earn additional crypto as the result of a hard fork, the new crypto is considered ordinary income at the time of receipt. The cost basis is the fair market value of that crypto at the time of receipt. Soft forks are not taxable and there is no change in the coins taxability.
- What's the cost basis of inherited crypto? For inherited cryptocurrency or other digital assets, the cost basis is usually the fair market value on the date of the benefactor’s death.
- What's the cost basis for gifts? When you receive cryptocurrency as a gift, you inherit the giver’s cost basis and acquisition date. I'd advise the giver to send this information to the recipient in a gift letter.
- What about mining rewards? The basis for mined crypto is the fair market value at the time the assets were awarded.
- What about staking rewards? The cost basis for staking rewards is the fair market value of the asset at the time of each deposit. If your staking rewards are locked up for a set period of time, then the rewards are only taxable when they become unlocked.
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