Your cost basis is the total amount you paid to acquire bitcoin, including any applicable fees. This figure is essential when you sell or otherwise dispose of bitcoin, as it determines whether you’ve experienced a capital gain or capital loss.

Understanding cost basis and bitcoin "lots"

Each time you acquire bitcoin, by making a purchase or receiving a payment or gift, a new "lot" is created. A lot is defined by:

• The amount of bitcoin purchased
• The price at which it was acquired
• The date of the transaction

When you send, spend, sell, or gift bitcoin, one or more of your lots (either fully or partially) are used to fund the transaction. Which lots get used first depends on your accounting method.

Your country's tax rules may allow or require specific methods for determining which lots are used first. Common methods include:

• FIFO (First-In, First-Out): Uses your oldest lots first
• LIFO (Last-In, First-Out): Uses your most recent lots first
• HIFO (Highest-In, First-Out): Uses the lots with the highest cost first

You can download your trading history to calculate your cost basis for yourself. At Strike, a cost basis calculation is also provided on your 1099-B using HIFO.

Example of a HIFO cost basis calculation:

• January: You bought ₿0.05 at $35,000/BTC for a cost of $1,750, or $1,767.50 with fees included.
• June: You bought ₿0.03 at $45,000/BTC for a cost of $1,350, or $1,363.50 with fees included.
• December: You sold ₿0.04 at $55,000/BTC for a sale revenue of $2,200, or $2,178.00 with fees deducted.

Overall, you purchased ₿0.08, spending a total of $3,131.00, and sold ₿0.04, receiving a total of $2,178.00. To determine whether the sale of ₿0.04 resulted in a capital gain or loss, you must determine the cost basis at which the ₿0.04 was acquired. Using HIFO, you use the highest cost first:

1. Use the entire June purchase of ₿0.03 at $45,000, which cost $1,363.50 (fees included).
2. Use a portion of the January purchase of ₿0.05 at $35,000/BTC to account for the remaining ₿0.01 of the sale:
   • Portion used: (0.01 / 0.05) = 0.20 or 20%
   • Pro-rated cost: 0.20 X $1,767.50 = $353.50

Total cost basis of ₿0.04 sold: $1,363.50 (June lot) + $353.50 (January lot) = $1,717.00

The sale, after fees, totaled $2,178.00, which means the capital gain was $461.00 ($2,178.00 - $1,717.00). This example illustrates how fees and the HIFO method impact your reported gains or losses for tax purposes.

Strike does not provide tax advice. These FAQs are for informational purposes only and shouldn’t be considered tax advice or recommendations. Please consult a professional regarding the tax implications of buying and selling bitcoin.