As the premier back-office platform powering 300+ crypto enterprises, we recognize the need for a wide variety of cost-basis methodologies.

Cryptio is proud to announce support for all major cost-basis methodologies – FIFO, LIFO, WAC, and HIFO. All of which can be applied to your entire sub-ledger (universally) or individual sources (per wallet).

Determining the cost basis methodology for valuing book assets is a key component of establishing proper accounting books and records as well as tax planning for a client. This guide will help you navigate the key considerations when choosing the cost-basis methodology for your crypto business or institution.

What is the cost basis?

Cost basis is defined as “the original value or purchase price of an asset or investment for tax purposes. The cost basis value is used in the calculation of capital gains or losses, which is the difference between the selling price and purchase price.”

There are 4 main cost-basis methodology options for digital assets:

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

Each of these function differently but are allowable under current accounting guidance based on the operating circumstances of a company. They each have their benefits as well and there is no “best” approach. Let’s take a look into each one and how they function:

A. FIFO - First in, First out 🥇

FIFO methodology uses a chronological approach: the first acquired tokens are the first tokens that are counted when a sale or tax-triggering event occurs. Let's look at an 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

What are his realized gains or losses on this sale?

Under FIFO, the first ETH he acquired was on 5/1 for $2000. This would be the cost basis used when he sells 1 ETH for $2600. This would result in a $600 gain (sale price - current cost basis) ($2600 - $2000). Journal entry would look like this:

FIFO is considered the most conservative approach and most widely accepted when valuing crypto assets.

It is important to note that with all methodologies, the reduction of the asset on your books should always equal the cost basis, not the sale price. In this case that is $2000. Now let's take a look at WAC or weighted average cost.

B. WAC - Weighted Average Cost 🏋🏾

WAC methodology takes a mathematical approach: the cost basis for all tokens is the average price paid to acquire them. 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

What are her realized gains or losses on this sale?

The transaction data is similar to our first example however under WAC, her cost basis will be the average price of her 2 ETH purchases. This would equal to $2000 + $2500= $4500/2 = $2250. Her cost basis for both ETH assets is $2250 each. This would result in a gain of $350 for this sale ($2600 - $2250). Journal entry:

Same data, different gain recognized. WAC is typically used when it is deemed too difficult to gather complete transaction price data in chronological order for all transactions. This would make it significantly easier for a company to simply average the price of its purchases.

C. LIFO - Last in, First out ⏮️ 

LIFO is similar to FIFO but on the other end of the spectrum: the last acquired tokens are the first tokens that are 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

What are his realized gains or losses on this sale?

Under LIFO, his last acquired ETH was at a price of $2500. This would be his cost basis for this transaction. This would result in a gain of $100 for this sale ($2600 - $2500). Journal entry:

In this example, LIFO allowed Ash to book a smaller realized gain than Theo and Tunde were able to. This means he will pay lower taxes on the same transaction than both of them as well. Although this might not always be the case, it highlights some of the tax planning benefits when weighing which methodology is best.

D. HIFO - Highest in, First out 🆙

Finally, HIFO is determined 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

What are her realized gains or losses on this sale?

Under HIFO, her highest priced ETH purchase was on 5/2 for $2300. This would be her cost basis for this transaction and would result in a gain of $300 for this sale ($2600 - $2300). Journal entry:

Similar to our LIFO example, HIFO allowed for the lowest realized gain in this circumstance. FIFO would have resulted in $600, WAC in $567, and LIFO in $800. Tax planning benefits!

Here are some additional nuances to point out💡

Can a company change its cost basis after establishing one?

Yes! This is uncommon but a company can change its cost basis! Typically this would be at the direction of an auditor or changing accounting guidance that points to a more appropriate methodology.

It would be heavily scrutinized and raise audit red flags if a company changed its cost basis back and forth each year to fit a methodology that would result in greater tax savings. Cost basis is first and foremost for accurate and appropriate valuations, not tax savings.

Is there one methodology that always results in greater tax savings?

No! Although HIFO and LIFO tend to be used for tax savings, it isn’t a universal truth. Tax saving results for each methodology can vary based on market conditions for example. In a bull market or periods of increasing prices, LIFO and HIFO will most likely lead to lower taxable gains. However, during bear markets or falling prices, FIFO will most likely result in lower taxable gains. The only important note here is that WAC is currently not allowable under IRS guidelines for crypto tax purposes, it is still allowable for book purposes.

There are other components that can affect this decision. Clients should ultimately decide what is best for their business with a tax professional.

Want a consultation to understand how cost basis impacts your company?

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Note: This article is for educational purposes and must not be treated as financial advice.