Cost basis is the foundation of every capital gains calculation. Get it wrong, and you're either overpaying taxes or risking an audit. Get it right, and you could save thousands. Here's everything you must know.
What Is Cost Basis?
Cost basis is what you paid for an asset, including any fees or acquisition costs. It's used to determine your gain or loss when you sell.
The Magic Formula
Gain (or Loss) = Sale Price - Cost Basis
What's Included in Cost Basis?
Your cost basis isn't just the purchase price:
- Purchase price — What you actually paid
- Transaction fees — Gas, exchange fees, network costs
- Associated costs — Any costs to acquire the asset
Cost Basis Methods Explained
When you sell crypto, you must identify which units you're selling. Different methods produce different tax outcomes:
FIFO — First In, First Out
Sell your oldest holdings first. This is the default method and required by some software.
Best when: Oldest purchases have lowest cost basis (you made profit)
LIFO — Last In, First Out
Sell your newest holdings first. Useful when recent prices are lower.
Best when: Recent purchases have higher cost basis (reduces gains)
HIFO — Highest In, First Out
Sell your highest-cost holdings first. Usually produces the lowest taxes.
Best when: You want to minimize capital gains
Specific Lot Identification
Manually select which specific units to sell. Gives you maximum control.
Best when: You have detailed records and want precise optimization
Example: Which Method Saves More?
Scenario: You bought 1 BTC at three different times
- • Jan 2023: 1 BTC @ $20,000 = $20,000
- • Jan 2024: 1 BTC @ $40,000 = $40,000
- • Jan 2025: 1 BTC @ $60,000 = $60,000
Now sell 1 BTC for $100,000 (today's price)
| Method | Cost Basis | Gain | Tax (at 20%) |
|---|---|---|---|
| FIFO | $20,000 (oldest) | $80,000 | $16,000 |
| LIFO | $60,000 (newest) | $40,000 | $8,000 |
| HIFO | $60,000 (highest) | $40,000 | $8,000 |
💡 Result
In this scenario, HIFO saves you $8,000 in taxes compared to FIFO. The difference between LIFO and HIFO depends on which purchases have the highest basis.
What Method Should You Use?
- HIFO is generally optimal — Sell highest-cost first = lowest gains
- FIFO is the default — Required by some software; simplest
- LIFO rarely beats HIFO — Unless you're specifically timing purchases
- Specific Lot is most precise — But requires detailed record-keeping
Wash Sales & Cost Basis
If you sell at a loss and buy the same (or "substantially identical") asset within 30 days, the wash sale rule may disallow the loss. The loss is added to the cost basis of the new purchase.
Cost Basis Across Chains
With multi-chain portfolios, tracking cost basis gets complex:
- Same token, different chains — ETH on Ethereum vs. ETH on Arbitrum are different assets
- Bridged assets — Generally not taxable (same asset)
- Wrapped tokens — Usually treated as identical (WETH = ETH)
How Arthur Labs Handles This
- Multiple cost basis methods supported (FIFO, LIFO, HIFO, Specific Lot)
- Automatic optimization suggestion
- Fee inclusion in cost basis
- Cross-chain cost basis tracking
Find Your Optimal Strategy
We calculate your taxes under different methods and show you the savings.
Scan Your Wallet →Disclaimer: This article is for educational purposes only. Tax laws vary — consult a qualified tax professional.