Cost basis is two questions wearing one name: what a unit cost you, and which unit you are deemed to have sold. The IRS virtual currency FAQ answers both directly, which is unusual enough in this index to be worth saying plainly, and it answers the second one twice: once for the filer who can identify the units, and once for the filer who cannot.
What basis is, in the FAQ's own definition
Q8 answers it without referring out: “Your basis (also known as your “cost basis”) is the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs in U.S. dollars.” It then distinguishes adjusted basis, your basis increased by certain expenditures and decreased by certain deductions or credits, and sends the reader to Publication 551, Basis of Assets, for more.
Received tokens take the value at receipt
Bought is not the only way in, and the FAQ handles the others. Q13 covers virtual currency received for services: in an arm's length transaction your basis “is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received”. Q18 does the same in reverse, for property received in exchange for virtual currency, at its fair market value at the time of the exchange.
You may choose the units, if you can substantiate them
A39 is the answer most cost-basis tooling is built around: “You may choose which units of virtual currency are deemed to be sold, exchanged, or otherwise disposed of if you can specifically identify which unit or units of virtual currency are involved in the transaction and substantiate your basis in those units.” The permission and the evidential condition arrive in the same sentence.
If you do not identify them, the order is fixed
A41 supplies the default: if you do not identify specific units, they “are deemed to have been sold, exchanged, or otherwise disposed of in chronological order beginning with the earliest unit of the virtual currency you purchased or acquired; that is, on a first in, first out (FIFO) basis.” So the method is not open. It is specific identification with substantiation, or FIFO.
The clock the answer is measured against
Q6 fixes the holding period to the day: one year or less between acquisition and disposal is short-term, more than a year is long-term, and the period “begins on the day after you acquired the virtual currency” and ends on the day of the sale or exchange. Q7 then sets the gain as the difference between adjusted basis and the amount received. Q43 routes the result to Form 8949 and Schedule D.
Questions people ask about crypto cost basis
Does the IRS name a cost basis method for crypto?
Yes, in two steps. A39 lets you choose the units disposed of if you can specifically identify them and substantiate your basis in them. A41 says that if you do not, the units are deemed sold in chronological order from the earliest acquired, on a first in, first out basis.
What counts towards basis?
Q8: the amount you spent to acquire the virtual currency, including fees, commissions and other acquisition costs, in US dollars. Adjusted basis is that figure increased by certain expenditures and decreased by certain deductions or credits; Publication 551 is named for more.
What is the basis of crypto I was paid in?
Q13 gives the fair market value of the virtual currency in US dollars when it is received, for an arm's length transaction in which you provided services. An airdrop after a hard fork is handled separately at Q24, at fair market value when received.
When does the holding period start?
Q6 says the day after acquisition, and it ends on the day of the sale or exchange. That boundary decides short-term against long-term, which the FAQ distinguishes even though it states no rate on either page read here.