What Is Cost Basis?
Cost basis is the total cost of acquiring an asset, including the purchase price plus any fees, commissions, or transfer costs. If you buy 1 ETH at $3,000 and pay $10 in fees, your cost basis is $3,010. For tax purposes, cost basis is subtracted from the sale price to determine your capital gain or loss.
How Cost Basis Works
When buying an asset in multiple lots at different prices, your average cost basis is the weighted average. Methods include: FIFO (first in, first out — oldest lots sold first), LIFO (last in, first out — newest lots sold first), and specific identification (choose which lot to sell). The method affects your tax liability significantly — LIFO during rising markets realizes smaller gains.
Why It Matters for Traders
Tracking cost basis precisely is critical for both trading performance and tax compliance. In crypto, where you might buy BTC across multiple exchanges, DCA over months, receive airdrops, and earn staking rewards — each with different cost bases — tracking gets complex quickly. Using a portfolio tracker or trading journal that calculates cost basis automatically prevents costly errors and missed tax deductions.
