If you have traded cryptocurrency, you have likely wondered about the easiest way to calculate your cost basis for tax purposes. The average cost method—commonly used for mutual funds—might seem appealing. However, the IRS has made significant changes to how digital asset cost basis must be tracked. This guide explains the current rules, what methods are permitted, and what records you need to keep to stay compliant.
No. The IRS does not permit the use of the average cost basis method for cryptocurrency or other digital assets.[reference:0] Unlike mutual funds, where you can elect to use an average basis[reference:1], digital assets are treated as property, and the cost basis must be determined using either the specific identification method or the first-in, first-out (FIFO) method.[reference:2]
Furthermore, beginning January 1, 2025, the IRS requires taxpayers to track cost basis on a per-wallet or per-account basis, effectively eliminating the "universal" or pooled cost basis method that some taxpayers previously used.[reference:3][reference:4] This means you cannot simply average the cost of all your holdings across different wallets and exchanges.
Your cost basis is the amount you paid to acquire a digital asset, including fees, commissions, and other acquisition costs.[reference:5] When you sell or dispose of the asset, your gain or loss is calculated as the difference between the sale proceeds and your cost basis.[reference:6]
Accurate cost basis tracking is essential because it directly affects the amount of tax you owe. A higher basis means a lower taxable gain (or a larger deductible loss). The IRS treats digital assets as property, so the same general tax principles that apply to stocks and real estate also apply to cryptocurrency transactions.[reference:7]
Your basis also determines your holding period, which affects whether your gain is taxed as short-term (held one year or less) or long-term (held more than one year).[reference:8] Short-term gains are taxed at ordinary income rates, while long-term gains benefit from preferential capital gains rates.
Effective January 1, 2025, the IRS requires taxpayers to track digital assets on a per-wallet or per-account basis.[reference:9][reference:10] This means you must calculate cost basis separately for each wallet, exchange account, or other location where you hold digital assets.[reference:11]
Previously, some taxpayers used a "universal" or pooled method, where they treated all holdings across multiple wallets, exchanges, and cold storage as one big pool and could choose which basis to apply to a sale.[reference:12] This allowed cherry-picking the most favorable basis from any account. The IRS has now eliminated this practice.[reference:13]
To help taxpayers transition, the IRS issued Revenue Procedure 2024-28, which provides a one-time safe harbor to allocate unused basis among wallets and accounts as of January 1, 2025.[reference:14][reference:15] Under this safe harbor, taxpayers could reallocate basis using any reasonable method, as long as they kept detailed records of the allocation.[reference:16]
If you did not take advantage of this safe harbor by January 1, 2025, you are now "locked in" to whatever basis allocations existed at that time and cannot retroactively reallocate basis between wallets.[reference:17]
Under current IRS guidance, taxpayers may use one of two methods to determine which units of digital assets are deemed sold or disposed of:
FIFO is the default method used by the IRS if you do not specifically identify which units you are selling.[reference:19][reference:20] Under FIFO, the earliest acquired units are deemed sold first. This method is straightforward and often results in higher taxable gains in a rising market because older units typically have lower cost bases.
With Specific ID, you can choose which specific units you are selling, as long as you can identify them and substantiate their basis.[reference:21] To use this method, you must document the specific unit's unique identifier or maintain records showing the date and time each unit was acquired, its basis, and its fair market value at acquisition.[reference:22]
Specific ID offers more flexibility and can be more tax-efficient, as you can choose to sell units with the highest basis to minimize gains (or maximize losses). However, it requires meticulous recordkeeping.
Some taxpayers have used HIFO (highest in, first out) or LIFO (last in, first out) methods. However, the IRS has not explicitly approved these as standalone methods for cryptocurrency.[reference:23] While some tax software supports them, you should proceed with caution and consult a tax professional before using HIFO or LIFO.[reference:24]
Beginning in 2025, brokers are required to report digital asset transactions on the new Form 1099-DA, Digital Asset Proceeds From Broker Transactions.[reference:26][reference:27]
For the 2025 tax year, brokers must report gross proceeds from digital asset sales.[reference:28][reference:29] However, they are not required to report cost basis for 2025 transactions.[reference:30][reference:31] This means you will need to calculate your own cost basis using your records when preparing your tax return.[reference:32]
Starting in 2026, brokers must report both gross proceeds and cost basis for digital assets acquired on or after January 1, 2026, and held on the same platform through the date of sale.[reference:33][reference:34][reference:35] This will make reporting easier for some taxpayers but also increases the importance of accurate recordkeeping, as the IRS will receive matching data.[reference:36]
Even if you do not receive a Form 1099-DA, you are still required to report all income, gains, and losses from digital asset transactions.[reference:37] You must also answer the digital asset question on your tax return, indicating whether you engaged in any digital asset transactions during the year.[reference:38]
Accurate recordkeeping is the foundation of proper tax reporting. The IRS requires you to maintain records that substantiate your cost basis and holding period for every digital asset transaction.[reference:39]
You should keep your records for at least three years from the date you filed your tax return, or longer if you have carryover losses or other complex situations. In practice, many tax professionals recommend keeping records for at least seven years to be safe.
The table below compares the key cost basis methods for cryptocurrency, including whether they are permitted by the IRS.
| Method | How It Works | IRS Permitted? | Complexity | Best For |
|---|---|---|---|---|
| FIFO | Earliest acquired units sold first | ✅ Yes (default) | Low | Simplicity, long-term holders |
| Specific Identification | Choose specific units to sell | ✅ Yes (with documentation) | High | Tax optimization, active traders |
| HIFO | Highest cost units sold first | ⚠️ Not explicitly approved | High | Minimizing gains |
| LIFO | Most recently acquired units sold first | ⚠️ Not explicitly approved | High | Tax optimization in some scenarios |
| Average Cost | Average of all acquisition costs | ❌ Not permitted | Low | N/A — not allowed |
📌 This table is a general guide. Always consult a tax professional for your specific situation. IRS rules and interpretations may change.
Alex has two wallets: Wallet A (an exchange account) and Wallet B (a hardware wallet). Alex bought 1 BTC in Wallet A for $20,000 and later bought another 1 BTC in Wallet A for $30,000. In Wallet B, Alex bought 1 BTC for $25,000.
In 2025, Alex sells 1 BTC from Wallet A for $40,000. Under the per-wallet rules, Alex must use the basis from Wallet A only. Alex cannot use the $25,000 basis from Wallet B to reduce the gain.
Alex can choose either FIFO or Specific ID for Wallet A:
Alex chooses Specific ID to minimize the taxable gain but must keep records to substantiate the identification.
⚠️ Tax compliance for cryptocurrency is complex and carries significant risk. This guide is for educational purposes only and does not constitute legal, financial, or tax advice. The IRS rules are subject to change, and individual circumstances vary widely.
Always consult a qualified tax professional for guidance on your specific situation. Keep meticulous records and stay informed about changes to IRS rules and regulations.
📌 Verification reminder: IRS forms, deadlines, and reporting requirements change frequently. Always verify current information directly from the IRS website or consult a tax professional.
No. The average cost method is not permitted for cryptocurrency. You must use either FIFO (first-in, first-out) or Specific Identification.[reference:62]
Beginning January 1, 2025, the IRS requires taxpayers to track cost basis on a per-wallet or per-account basis.[reference:63] This means you cannot pool basis across different wallets or accounts.
It is a one-time opportunity to allocate unused basis among your wallets and accounts as of January 1, 2025.[reference:64] You must keep a detailed record of how you allocated the basis.[reference:65]
For 2025, Form 1099-DA reports gross proceeds from digital asset sales. Brokers are not required to report cost basis for 2025 transactions.[reference:66][reference:67] Starting in 2026, cost basis will also be reported for covered assets.[reference:68]
You must keep records of the date, amount, fair market value, and wallet location for every acquisition and disposition of digital assets.[reference:69][reference:70]
The IRS has not explicitly approved HIFO or LIFO as standalone methods for cryptocurrency.[reference:71] While some tax software supports them, you should consult a tax professional before using them.
If you cannot substantiate your cost basis, the IRS may treat the sale as having zero basis, meaning the entire proceeds become taxable gain.[reference:72] You could also face accuracy-related penalties.[reference:73]
Yes. Every taxpayer must report all income, gains, and losses from digital asset transactions, regardless of whether they receive a Form 1099-DA.[reference:74]