Cost basis methods are different accounting rules for determining capital gains. Each country has different rules for which method is allowed and should be used. The most common method is FIFO (First In First Out) and is the recommended method in the US, while other countries have specific methods like ACB in Canada and Shared Pool in the UK.
Let's look at a very basic example explaining how FIFO and LIFO (Last In First Out) works:
David buys bitcoin on three different occasions:
- 0.5 BTC on March 15th 2019 for $2,100
- 0.5 BTC on April 20th 2019 for $2,650
- 0.5 BTC on June 10th 2019 for $4,500
Later, David decides to sell 1 BTC in July for $9,500. To accurately calculate his capital gains from this sale, David needs to know the cost basis for the coins he sold. Using FIFO, his cost basis becomes $2,100 + $2,650 = $4,750. By using LIFO, his cost basis becomes $4,500 + $2,650 = $7,150. The capital gains are then determined this way:
- FIFO: $9,500 - $4,750 = $4,750
- LIFO: $9,500 - $7,150 = $2,350
The default cost basis method in Coinpanda is FIFO as this is the most commonly used method in most countries. If you are unsure about which method you should choose, you can contact your local tax authority and ask which method can/should be used for calculating capital gains and then change this on the Settings page.
See also this blog post that goes into depth about cost basis and calculating taxes for US citizens.