Cost basis represents the original value of an asset for tax purposes. It is used to determine your capital gains/losses incurred whenever you dispose of your crypto (trade or sell).

Put another way, cost basis typically represents how much money you put into purchasing your crypto (i.e. how much it cost you).

If you bought 1 Litecoin for $250, your cost basis is $250 per Litecoin.

If you later trade this Litecoin when it is worth $300, you subtract your cost basis from the $300 to arrive at your $50 capital gain from the trade. This is how crypto tax calculations are done at a high level.

To learn more about cost basis and how it is calculated, we recommend reviewing this in-depth guide written by our team of tax professionals.

Cost basis is calculated based on the fair market value of the asset being disposed in any transaction.

For example, if you paid $1,000 USD for 1 ETH, your cost basis in that 1 ETH is the fair market value of $1,000 USD at the time of the disposal ($1,000).

For a crypto-crypto trade, the same applies.

If you traded 1 BTC for 10 ETH on March 12 2020, the system will perform a lookup as to the fair market value of 1 BTC at the time of this trade. The fair market value of the disposed asset (in this case BTC) becomes the cost basis in your 10 ETH moving forward.

As long as all of your transaction history data has been imported into CoinLedger and is up to date - including imports from all exchanges and blockchains you have used over the years, for all years of your trading history - your cost basis will be correctly calculated.

If you’ve bought cryptocurrency at multiple price points, you’ll need to use an accounting/cost basis method to calculate your cost basis. FIFO (first-in-first-out), LIFO (last-in-first-out), and HIFO (highest-in-first-out) are different accounting methods used to calculate cryptocurrency gains and losses. You can change which method you use within your Tax Settings.

If you are in the United States, CoinLedger defaults new accounts to use HIFO, which minimizes capital gains.

To learn more about how these costing methods work, please see this guide: https://help.coinledger.io/en/articles/3130354-which-crypto-tax-accounting-methods-does-coinledger-support