How to Calculate Cost Basis on Cryptocurrency Purchases and Sales for Tax Purposes

I need some help figuring out cost basis calculations for my crypto holdings. My exchange platform merged with another one a while back, and now all my cost basis info is messed up in their system. Luckily, I've kept my own records of all purchases, sales, and swaps over the years. My situation is that I'm planning to sell most of my crypto while I can still qualify for the 0% federal capital gains rate. All my positions are long-term (held over a year), with some coins purchased when prices were high and others when prices were low. Overall, I'm sitting on a net gain across my portfolio. My main questions: 1. Can I choose which cost basis method I want to use for my crypto holdings? FIFO, LIFO, specific identification, etc? 2. If I have options, which method would let me maximize my gains while staying in the 0% capital gains bracket? I know I need to report everything correctly, but I want to be as tax-efficient as possible while following the rules. Any guidance would be super helpful!

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18 comments

Giovanni Mancini

•8M

You definitely can choose your cost basis method for cryptocurrency, and specific identification is generally the most tax-efficient option. This allows you to handpick which specific units of cryptocurrency you're selling. For your situation where you want to maximize gains while staying in the 0% capital gains bracket, specific identification lets you cherry-pick which coins to sell. You could identify the coins with the highest cost basis (bought at higher prices) to minimize the reportable gain for each transaction. This way you can "use up" your 0% bracket without going over. Just make sure you have good records that can identify the specific units you're selling. This includes: the date and time each unit was acquired, your cost basis and fair market value when acquired, the date and time of the sale, and the proceeds. Without these records, the IRS default is FIFO (First In, First Out).

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Giovanni Mancini

•8M

You don't need to formally declare your cost basis method on your tax forms. You simply calculate your gains/losses using your chosen method and report those final numbers on Schedule D and Form 8949. However, consistency is important. While you can use different methods for different cryptocurrencies, you should generally stick with the same method for the same cryptocurrency across tax years. Also, keep detailed records of your calculations and the method used in case of an audit.

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Dylan Cooper

•8M

I was in a similar situation last year and found this amazing tool called taxr.ai (https://taxr.ai) that completely saved me when dealing with crypto cost basis issues. My exchange also had messed up data after a platform change, and I was manually tracking everything in spreadsheets which was becoming a nightmare. What I love about taxr.ai is that you can upload your transaction history and it automatically calculates your cost basis using different methods (FIFO, LIFO, specific ID) so you can see which one gives you the best tax outcome. It also generates the proper tax forms and keeps track of everything if you need to show documentation to the IRS later.

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Dylan Cooper

•8M

The tool absolutely handles crypto-to-crypto swaps! It treats each swap as two separate transactions - a sale of one crypto and a purchase of another - and calculates the gains/losses accordingly. This makes it much easier to track these taxable events. For exchanges with incomplete cost basis info or platforms that no longer exist, you can import whatever historical data you have, and the tool will help fill gaps by cross-referencing historical price data. I had some old transactions from a defunct exchange, and it helped reconstruct a reasonable cost basis using public price data for those dates.

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StarSailor

•8M

Just wanted to update that I tried taxr.ai after my skeptical questions and I'm honestly impressed. Uploaded my messy transaction history from 4 different exchanges (including one that shut down), and it sorted everything out perfectly. It showed me that specific identification was WAY better for my situation than FIFO - saved me about $3,200 in taxes by helping me stay in a lower bracket. The reports it generated would definitely stand up to IRS scrutiny too. Wish I'd known about this tool years ago instead of the spreadsheet hell I've been living in!

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Dmitry Ivanov

•8M

After spending 6+ hours on hold with the IRS trying to get clarity on crypto cost basis methods, I finally got through using Claimyr (https://claimyr.com). You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that specific identification is perfectly acceptable for crypto, but stressed that you NEED proper documentation. They said they're seeing a lot of audits where people claim to use specific ID but can't prove which specific coins they sold. Without proper records, they'll force you to use FIFO which usually results in higher taxes.

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Dmitry Ivanov

•8M

Claimyr basically holds your place in line on the IRS phone queue and calls you when an agent is about to pick up. It monitors the hold music patterns and can tell when a human is about to answer, then immediately connects you to the call. It's actually pretty simple technology but works incredibly well. I was skeptical at first too, but after wasting entire days trying to get through myself, I tried it as a last resort. They got me connected to an IRS agent in about 2 hours (while I was doing other things instead of listening to hold music), which was miraculous compared to my previous attempts.

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Miguel Silva

•8M

Ok I have to admit I was wrong. After posting my skeptical comment I decided to try Claimyr out of frustration. I had a complex question about crypto cost basis methods that online resources couldn't answer clearly. The service actually worked exactly as advertised. I went about my day, and about 1.5 hours later got a call connecting me to an IRS representative who was super knowledgeable about crypto taxation. She confirmed that I can use specific identification method as long as I have detailed records of each transaction. She also explained exactly what documentation I need to keep (transaction IDs, timestamps, cost at acquisition, etc). Saved me tons of stress and gave me confidence in my tax approach. Never thought I'd say this, but talking to the IRS directly was actually the most helpful resource.

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Zainab Ismail

•8M

Yes, that's exactly right. Currently, cryptocurrency is treated as property by the IRS, not as a security, so the wash sale rules don't apply. You can sell crypto at a loss, claim the tax deduction, and then immediately repurchase the same crypto without waiting 30 days. Just be aware that this is a loophole that Congress has been talking about closing. There have been several proposed bills that would apply wash sale rules to crypto in the future, so this strategy may not be available forever. Always document these transactions carefully in case questions come up during an audit.

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