Master cost basis calculation methods including FIFO, LIFO, and Specific Identification to minimize your tax burden.
Your cost basis is what you originally paid for your Bitcoin, including any fees. Understanding cost basis is critical because your taxable gain equals your sale price minus your cost basis.
Cost Basis Methods
FIFO (First In, First Out): The oldest coins you bought are considered sold first. This is the IRS default method.
LIFO (Last In, First Out): The newest coins are sold first. Can be advantageous in rising markets.
Specific Identification: You choose exactly which coins to sell. Requires detailed record-keeping but offers the most tax optimization.
Example Calculation
You bought 1 BTC at $30,000 in January 2023.
You bought 1 BTC at $40,000 in June 2023.
You sell 1 BTC for $50,000 in December 2023.
Using FIFO: Gain = $50,000 - $30,000 = $20,000 taxable
Using LIFO: Gain = $50,000 - $40,000 = $10,000 taxable
The method you choose can significantly impact your tax bill.
