In crypto accounting, cost basis is the asset’s original value, that is, what your business paid to acquire it. It determines your capital gains or losses when you sell, swap, or spend crypto assets.
For Web3 businesses, cost basis tracking isn’t straightforward since trades occur across multiple wallets, exchanges, and chains, often in different currencies. This implies that without proper automation, reconciling purchase history and disposal records becomes a compliance nightmare.
However, accurate crypto cost-basis accounting is critical for audit readiness and regulatory alignment under IFRS and GAAP, where digital assets must reflect transparent, traceable valuations. In this guide, we will take a closer look at crypto cost-basis methods so you can evaluate which option best suits your business.
What Are Cost Basis Methods and Why Do They Matter in Crypto Accounting?
Cost basis methods determine which coins you sell first when you dispose of your crypto, with each producing a different taxable outcome.
Below are the main approaches used by crypto accountants and businesses:
|
Method |
Principle |
Primary Advantage |
|
FIFO |
First coins purchased are the first sold |
Accepted globally, IFRS/GAAP compliant |
|
HIFO |
Highest-cost coins sold first |
Minimizes taxable gains |
|
ACB/WAC |
Average cost across all holdings |
Simplifies calculations |
|
LIFO |
Last coins purchased sold first |
Lower income in inflationary markets (rarely allowed) |
|
Specific Identification |
Precisely identify sold coins |
Optimized tax control and audit transparency |
|
Mark-to-Market |
Periodic revaluation to fair value |
Financial reporting accuracy, not tax basis |
However, choosing the right method balances compliance, simplicity, and tax outcomes.
FIFO (First In, First Out)
FIFO assumes that the first coins acquired are the first coins sold. This method aligns with IAS 2 (Inventories) and IAS 38 (Intangible Assets) under IFRS, making it the default accounting approach for crypto inventories. It is also consistent with U.S. GAAP treatment of digital assets (before FASB ASU 2023-08).
Example:
Let’s assume your firm buys:
- 2 BTC @ $90,000
- and another 2 BTC @ $100,000
If you sell 2 BTC at $110,000, FIFO assumes you sold the $90,000 lots first. This gives you a profit of $40,000.
That is, Gain = (110,000 − 90,000) × 2 = $40,000 total.
Although FIFO provides consistent reporting and is accepted by most regulators, it can generate higher taxable gains, especially during bull markets. This is because during such periods, the older, lower-cost items are the first ones recognized as sold. Eventually, it results in a larger difference between the sale price and the initial cost basis, thereby increasing the reportable profit and the associated tax liability.
HIFO (Highest In, First Out)
HIFO prioritizes selling the highest-cost assets first, minimizing taxable profits. It is popular with traders and funds seeking short-term tax efficiency.
Example (same portfolio as above):
Again, let’s assume your company purchases;
- 2 BTC @ $90,000
- and 2 BTC @ $100,000
Selling 2 BTC at $110,000 under HIFO implies that your company sold the $100,000 lots first, resulting in a $20,000 profit.
That is, Gain = (110,000 − 100,000) × 2 = $20,000 total.
While HIFO isn’t a default method under IFRS or GAAP, the IRS permits it under Specific Identification, provided clear records identify which coins were sold. In bull markets, HIFO reduces immediate tax liability, unlike FIFO. However, inconsistent documentation can lead to audit challenges in volatile conditions.
ACB/WAC (Average or Weighted Average Cost)
The Average Cost Basis (ACB) or Weighted Average Cost (WAC) method determines the cost per unit as the total cost of all coins divided by the total quantity.
Average cost = Total cost ÷ Total units
This method is widely accepted in Canada, the UK, and IFRS jurisdictions, providing smooth, stable results that avoid sudden tax spikes.
Example:
If your business owns 10 ETH purchased at various prices totaling $35,000, your average cost per ETH is $3,500. Any sale uses that figure for gain/loss computation.
Nevertheless, the downside of this approach is that it lacks precision during volatile markets or when tracking specific token lots. This is because they pool costs into a single average, which conceals the unique performance of individual purchases.
LIFO (Last In, First Out)
LIFO assumes the newest coins acquired are sold first. Traditionally used to minimize taxable income in inflationary environments, it is not recognized under IFRS or U.S. tax law for crypto. Some firms model LIFO internally for forecasting or management reporting, but it cannot be used for external filings or audited statements.
Specific Identification (SpecID)
Specific Identification allows the precise selection of which purchase lot is sold. To use it, you must maintain detailed transaction records, wallet-level identifiers, timestamps, and price documentation.
This approach maximizes control over gains and losses, enhances audit transparency, and is entirely accepted by the IRS and CRA when proper documentation is maintained. As a result, SpecID is best suited for crypto funds, treasuries, and DAOs that manage complex portfolios and make strategic sale decisions.
Mark-to-Market Valuation
Under the Mark-to-Market (MTM) principle, digital assets are periodically revalued to their current market prices for financial reporting purposes, not for tax calculation. IFRS 13 (Fair Value Measurement) allows entities to present crypto at fair value when consistent with their business model, typically for funds or trading firms.
Example:
If your treasury holds 50 ETH purchased at $2,000 and the year-end price is $3,000, the revaluation gain of $1,000 appears in the revaluation surplus or the profit and loss (P&L) account, depending on policy.
Recording the gain in the Profit and Loss (P&L) account (as required under new US GAAP rules for crypto) would boost the company’s reported net income for that year. On the other hand, Revaluation Surplus, common under the IFRS revaluation model, would increase equity on the balance sheet without directly affecting net income, leading to smoother reported earnings.
Comparing All Methods: Which Should Your Business Use?
Below is a table comparing all cost basis methods described. This should guide your decision as to what methods work best for your business.
|
Method |
Compliance (IFRS/GAAP) |
Tax Efficiency |
Complexity |
Ideal Use Case |
|
FIFO |
Fully accepted |
Moderate |
Low |
Standard for most businesses |
|
HIFO |
Accepted with SpecID |
High |
Medium |
Active traders, funds |
|
ACB/WAC |
Accepted in IFRS jurisdictions |
Moderate |
Low |
Corporations, treasuries |
|
LIFO |
Not accepted |
Variable |
Medium |
Internal projections only |
|
SpecID |
Accepted if traceable |
High |
High |
Funds, DAOs, OTC desks |
|
Mark-to-Market |
Reporting only |
N/A |
Medium |
Treasuries, fair-value reporters |
Most Web3 businesses default to FIFO or ACB for simplicity and audit alignment, while advanced funds may adopt HIFO or SpecID for optimization.
Regulatory & Accounting Considerations (IFRS vs GAAP)
Both IFRS and U.S. GAAP traditionally classify crypto as intangible assets rather than cash equivalents. However, new guidance, such as FASB ASU 2023-08, now allows fair-value measurement for certain crypto assets, improving relevance in financial statements.
Under IFRS,
- IAS 2 and IAS 38 apply to cost basis and revaluation.
- IAS 21 governs FX translation for crypto trades denominated in foreign currencies.
These frameworks shape how cost basis data flows into your statements, emphasizing accurate acquisition and disposal records across all wallets.
Common Mistakes in Crypto Cost Basis Accounting
Crypto firms frequently encounter challenges in cost basis accounting. For instance, they may overlook including gas fees or broker commissions in acquisition costs. Additionally, using different cost basis methods across wallets or entities can create inconsistencies. Compounding these issues, failing to maintain timestamped records for methods like SpecID or HIFO further undermines accuracy.
Moreover, omitting revaluation entries under mark-to-market reporting can distort financial statements, highlighting the need for consistent, automated processes to ensure transparency and compliance.
With KoinX Books cost basis automation, discrepancies are flagged automatically, catching missing transactions, inconsistent lots, and outdated price data before audits do.
Conclusion
Selecting the right crypto cost basis accounting method depends on your jurisdiction, reporting framework, and automation level. While manual spreadsheets invite compliance risk, automated systems ensure transparent, regulator-friendly financials.
KoinX Books streamlines cost basis management by supporting FIFO, HIFO, and WAC methods, and automating fair-value and FX conversions. It also generates IFRS/GAAP-compliant gain and loss reports, and provides audit-ready ledgers for crypto treasuries and funds. With this, Web3 companies can ensure cost-basis accuracy, audit-readiness, and global compliance at scale.
Frequently Asked Questions
Which Cost Basis Method Gives The Lowest Crypto Tax?
Typically, the HIFO (Highest In, First Out) method minimizes taxable gains by selling the most expensive coins first. This approach can reduce reported profit but must align with your jurisdiction’s tax rules.
Can I Switch From FIFO to HIFO Mid-Year?
Switching is possible, but tax authorities usually require consistency throughout a fiscal year. Any change in the cost-basis method should be well documented and, ideally, approved by auditors to ensure compliance.
Is LIFO Allowed For Crypto Accounting?
LIFO (Last In, First Out) is not permitted under IFRS or U.S. tax law for crypto assets. This is to promote transparent and comparable financial reporting and prevent the artificial manipulation of income. Some firms use it internally for performance modeling, but not for official financial or tax reporting.
How Does Cost Basis Apply To DeFi And NFT Transactions?
Every on-chain transaction, including staking, swaps, and NFT sales, creates a disposal event. Accounting platforms like KoinX Books automatically trace wallet activity and apply the correct cost basis to compute gains and losses accurately.
Does KoinX Books Support Region-Specific Cost Basis Rules?
Yes, the platform supports jurisdiction-based cost-basis methods, such as ACB (Adjusted Cost Base) in Canada and FIFO in India and the U.S. It also automates IFRS and GAAP conversions for consistent reporting across entities.