Cost basis: What is it and how it can help you calculate your crypto taxes

The key to your capital gains tax, explained

What is cost basis?

If you sold, spent, or traded crypto this year, you probably have a few questions about how that impacts your taxes this year. We're here to help. If you made money from any of your crypto transactions, you'll likely owe taxes on your capital gains. And the first step in figuring out how much you owe is calculating your crypto's cost basis. Here’s what that means.

First things first...

Coinbase doesn’t provide tax advice. This article represents our stance on IRS guidance received to date, which may continue to evolve and change. None of this should be considered as advice or an individualized recommendation, but it’s important to us that our readers have relevant information available to them in the most accessible way possible. Please consult a tax professional regarding your own tax circumstances.

Calculating cost basis and capital gains

Here are two formulas you’ll need to calculate your cost basis and capital gains: 

Cost basis = Purchase price (or price acquired) + Purchase fees.

Capital gains (or losses) = Proceeds − Cost basis 

Let’s put these to work in a simple example:

Say you originally bought your crypto for $10,000 (including $35 in transaction fees). Even though you only hold $9,965 worth of crypto after fees, your total cost basis is what you paid to acquire that crypto. In this case: $10,000. 

Then a few years later, you sold and received $50,000 in proceeds (nice!). Your capital gains are these proceeds, minus your cost basis, so $50,000 - $10,000, or $40,000. Any fees you paid as part of the sale are subtracted from your proceeds.

Now let’s look at a more complex example: 

Let’s say you traded one crypto for another, like swapping bitcoin for ether. You sell BTC, and then use proceeds from the sale to buy ETH. Note that swapping one crypto for another is actually two separate transactions — in this example, first the sale of your BTC, for which there is a gain or loss, and then the purchase of ETH.

Here, the amount you paid for your ETH, including any transaction fees, would be its cost basis.

To put some numbers to this, let’s say you bought BTC for $10,000, including a fee, and sold it for $50,000 with no fee. Then you used the money to buy $50,000 worth of ETH, including a fee. You’ll need to pay capital gains taxes on your BTC, using a cost basis of $10,000. And the cost basis of your ETH is $50,000.

Keeping records is key

In general, the higher the cost basis of the crypto you’re selling, trading, or spending relative to the amount of proceeds you receive, the smaller your capital gain and, in most instances, the less tax you’ll pay.

It’s important to keep careful and detailed records of all your crypto transactions. If you're a Coinbase user, you can find reports with gains and loss data in the tax center. And for more information on crypto and taxes, check out our guide "Understanding crypto taxes."