How to Calculate Your Crypto Tax: Understanding the Cost Basis Method

To calculate CGT, you need a cost basis value, i.e. the original value of your crypto asset. Capital gains or losses would be the difference between the selling price of your crypto and its purchase price. If you make a capital gain, you need to fulfill a tax consequence according to your country's pre-determined tax rate.

Put simply, what you paid for acquiring a crypto asset -- including the transaction fee -- is your total cost basis. For example, you bought crypto for $1000 (including $10 in transaction fees). Your total cost basis, in this case, is $1000, even though you only hold $990 worth of crypto after purchasing fees.

A few months later, you sold the crypto for $3000. Your capital gain would be that proceeds, minus your total cost basis. So, $3000 - $1000 = $2000. You will be taxed on your $2000 Capital Gain.

You'll make a capital loss when there's a negative difference between the cost basis value and the sale price of the crypto.

Capital loss needs to be calculated as it can offset a capital gain, hence decreasing the CGT amount you need to pay.

In most cases, if you don't make any capital gains in a financial year, the loss can be carried forward to offset capital gains in future financial years.

FIFO is the most popular cost basis method because it's the most conservative from the accounting perspective. It assumes that the first crypto you acquired is disposed of first.

When the market of a crypto asset is inflationary (i.e. price continues to rise), using FIFO to determine the cost basis can result in a higher capital gain than if LIFO were used — which could mean greater tax to be paid.

Note that FIFO can be beneficial for investors who hold an asset for the long term, as it allows them to obtain long-term CGT discounts – which can result in lower crypto tax compared to when the usual tax rate is imposed.

Choosing HIFO for your crypto means you would first dispose of the asset with the highest cost basis. The nature of the HIFO method is to minimize the reported gains and maximize losses. In other words, it could result in the least amount of gains, hence the least overall tax in the short term.

LIFO is the opposite of FIFO, and so is the implication. LIFO assumes that the last crypto purchased is the first crypto sold.

In some cases whereby the crypto market is volatile that the crypto asset may not appreciate, LIFO method may result in lesser taxable capital gains. However, unlike FIFO, LIFO methods are only permitted in a few countries.

LOFO (Lowest In First Out), or is also known as LCFO (Lowest Cost First Out), will first dispose of the crypto asset with the lowest cost available when calculating your capital gains or losses – in contrast with HIFO.

With this method, your capital gain would more likely be higher than with other methods. But, you may obtain the benefit of discounted long-term CGT rates when it’s applicable.