Selecting the correct cost basis methodology is a key component of establishing proper accounting books and records. It is critical for complying with tax standards around gains and losses.

What is the cost basis?

Cost basis is the price you paid to purchase an asset or investment. This value is used to calculate capital gains or losses, which is the difference between the selling price and purchase price.

There are 4 main ways to calculate this for digital assets (aka cost-basis methodology):

1. FIFO - First in, First out
2. WAC - Weighted Average Cost
3. LIFO - Last in, First out
4. HIFO - Highest in, First out

Cryptio supports all of these cost-basis methodologies. All of them can be applied to your entire workspace (universally) or to individual sources (per wallet).

Moreover, these methodologies all comply with IFRS and US GAAP requirements.

Cost basis methodologies with examples:

FIFO - First in, First Out

Under this method, the first tokens acquired are the first tokens counted when a sale or tax-triggering event occurs.

For example:

1. Theo purchases 1 ETH on 5/1 for $2000
2. He purchases another 1 ETH on 5/2 for $2500
3. Finally, he sells 1 ETH on 5/7 for $2600

The cost basis here is therefore $2000. The realized gain is $600 ($2600 - $2000).

WAC - Weighted Average Cost

This methodology takes the average price paid to acquire all tokens to calculate their cost basis.

Let’s take a look at another example:

1. Tunde purchases 1 ETH on 5/1 for $2000
2. She purchases another 1 ETH on 5/2 for $2500
3. Finally, she sells 1 ETH on 5/7 for $2600

The cost basis here is the average price of her 2 ETH purchases. Therefore, $2000 + $2500 = $4500. Divide this by 2 and you get $2250. The cost basis for both ETH assets is $2250 each.

Tunde’s realized gain is $350 for this sale.

LIFO - Last In, First Out

This methodology means that the last acquired tokens are the first tokens counted when a sale or tax-triggering event occurs.

1. Ash purchases 1 ETH on 5/1 for $2000
2. He purchases another 1 ETH on 5/2 for $2500
3. Finally, he sells 1 ETH on 5/7 for $2600

Under LIFO, his cost basis is $2500. This results in a gain of $100 for this sale ($2600 - $2500).

HIFO - Highest In, First Out

HIFO is calculated by taking the token with the highest purchase price as the first token counted when a sale or tax-triggering event occurs.

1. Lucie purchases 1 ETH on 5/1 for $2000
2. She purchases another 1 ETH on 5/2 for $2300
3. Another is purchased on 5/3 for $1800
4. Finally, she sells 1 ETH on 5/7 for $2600

Her cost basis is $2300 since this was the highest-priced ETH purchase. This would result in a gain of $300 for this sale ($2600 - $2300).

Need help selecting the right methodology?

If you need deeper guidance on selecting the right methodology, read our blog written by one of our Accounting Strategy teams.

How to set up your preferred cost basis methodology:

You need to set up your cost-basis methodology when you create a new workspace.

1. On the Cryptio platform, click on the tiles icon to open the drop-down menu.
2. Select Manage workspaces.
3. Click on + Workspace and the Workspace edition menu will open.
4. Set up your Workspace by filling in the Name, Description, Currency, and Timezone.
5. Under Cost basis methodology, select your preferred method.
6. Click Create.

Watch us set up a workspace using LIFO Universal.

Can I change the cost basis on Cryptio?

We can change your methodology for you. If you need to change your methodology, get in touch with our Customer Support team.

❗ Changing your cost basis methodology every year to save on tax will be heavily scrutinized by auditors. The cost basis methodology is used primarily for accurate and appropriate valuations, not tax savings.