Cost Basis & Gains Explained

💰 Cost Basis & Gains Explained — The Most Misunderstood Rule in Crypto Taxes

Crypto taxes start with one critical number: your cost basis.
Whether you’re selling, swapping, spending, or receiving crypto, the IRS requires a precise record of how much you originally paid (or earned) for every unit of digital asset.

📖 Table of Contents

1️⃣ What Is Cost Basis?
2️⃣ How Gains & Losses Are Calculated
3️⃣ FIFO vs Specific ID — Which Saves Taxes?
4️⃣ Adjustments: Fees, Gas, Income-Based Basis
5️⃣ Real-World Crypto Examples
❓ FAQ
🔗 Reference Links
📚 Crypto Taxation Series

1️⃣ What Is Cost Basis?

Cost basis is the amount you paid (or earned) for a crypto asset.
This number is the foundation for every taxable calculation the IRS requires.

Your cost basis includes:

Purchase price in USD
Exchange fees and gas fees
The fair market value of crypto received as income

Example:

You buy 1 ETH at $2,000 and pay a $40 fee.
→ Your cost basis = $2,040.

2️⃣ How Gains & Losses Are Calculated

A capital gain or loss occurs when you dispose of crypto.
The IRS calculation is simple:

Gain/Loss = Amount Received – Cost Basis

Disposal includes:

Selling crypto for USD
Swapping for another coin
Paying for products or services

💠 Short-Term vs Long-Term

Short-term (≤ 1 year): taxed as ordinary income
Long-term (> 1 year): lower capital gains tax rates

3️⃣ FIFO vs Specific ID — Which Saves Taxes?

The IRS allows two main accounting methods for crypto:

FIFO (First In, First Out): oldest coins are sold first
Specific Identification: you choose which coins you sold

Specific ID often reduces taxes because you can strategically choose coins with higher basis.

Important:
Specific ID requires precise transaction records and wallet addresses.

4️⃣ Adjustments: Fees, Gas, Income-Based Basis

Fees increase your basis.
Gas fees count too — they either:

increase cost basis (buying), or
reduce proceeds (selling), or
become deductible business expenses (self-employed crypto activity)

Crypto received as income sets basis equal to fair market value when received.

Example:

You receive 0.05 BTC for work.
Value at the time: $1,500.
→ Your basis = $1,500.

5️⃣ Real-World Crypto Examples

Example A — Profit

Buy 1 SOL at $80
Sell at $110

Gain = $30

Example B — Swap

Buy ETH at $1,800
Swap ETH to AVAX when ETH = $2,200

Gain = $400 (taxable)

Example C — Long-Term

Buy BTC at $30,000
Hold 14 months
Sell at $39,000

Gain = $9,000 (long-term)

❓ Frequently Asked Questions

Q1. Does every swap create a gain or loss?
Yes — swapping crypto is treated as selling the first asset.

Q2. Do I include gas fees in basis?
Yes — gas fees are part of cost basis or reduce proceeds depending on the transaction.

Q3. Do staking rewards affect cost basis?
Yes — the value when received becomes your cost basis.

🔗 Reference Links

Recommended Crypto Tax Resources:

📚 EA Tax Guide Kindle eBooks

This section contains Amazon affiliate links.

*Amazon affiliate links included. As an Amazon Associate, I earn from qualifying purchases.

📚 Crypto Taxation Series (2025)

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Part 3: Cost Basis & Gains Explained — The Most Misunderstood Rule in Crypto Taxes