Service boundary: This guide explains reporting of client-supplied records. Monaco CPA does not monitor portfolios, recommend or execute tax-loss harvesting, select investments, or send reminders.
In This Article
- Key Takeaways
- What Is Crypto Cost Basis?
- What Is FIFO and How Does It Work for Crypto?
- What Is Specific Identification and How Does It Work for Crypto?
- FIFO vs. Specific Identification: Which Is Better for Crypto Cost Basis?
- What Is the Per-Wallet Basis Tracking Rule?
- What Changes for Sales After 2025?
- How Do I Rebuild My Crypto Cost Basis for My TY2025 Return?
- How Does Cost Basis Method Affect Tax-Loss Harvesting?
- How Do I Prepare for the 2026 Mandatory Crypto Basis Reporting Rules?
- Need Help With Crypto Cost Basis?
- Frequently Asked Questions About Crypto Cost Basis
- Ready to File With Confidence?
Key Takeaways
- FIFO (first in, first out) is the default crypto cost basis method if you have not made a specific election. The oldest lot of each asset is treated as the first sold.
- Specific Identification can identify which lot is disposed of when its timing, records, and communication requirements are met. Notice 2025-7, extended by Notice 2026-20, permits eligible book-and-record methods for broker-custodied units through December 31, 2026. The notices do not certify that every broker will support every requested identifier beginning in 2027.
- Per-wallet, per-account basis tracking is now mandatory under Treas. Reg. §1.1012-1(j), effective January 1, 2025 (Rev. Proc. 2024-28 provides the one-time safe harbor for allocating pre-2025 basis). You can no longer aggregate basis across all wallets and exchanges as one pool.
- Mandatory broker basis reporting begins for covered digital assets acquired on or after January 1, 2026. But transferred-in assets and pre-2026 acquisitions remain noncovered. Blank basis will persist on 1099-DAs for years.
- Your wallet and exchange history from prior years is essential. Every lot you still hold as of December 31, 2025 is a noncovered asset that requires self-reported basis whenever you sell it.
For Tax Year 2025, most brokers did not report your crypto cost basis on Form 1099-DA - basis reporting was entirely voluntary for TY2025. That changed on January 1, 2026: mandatory basis reporting now applies to covered digital assets acquired on or after that date. But the rules governing how basis is calculated, which lots are sold, and how basis is tracked across wallets are already in effect. If you are filing your 2025 return, the method you used (or should have used) to assign cost to each sale determines how much tax you owe.
This article covers the two primary cost basis methods, the per-wallet tracking requirement, and what you need to do now to prepare for the mandatory reporting era that began January 1, 2026. If you need help selecting the right method or reconstructing basis across wallets, the crypto tax services include cost basis analysis and per-wallet reconciliation.
What Is Crypto Cost Basis?
Cost basis is the amount you originally paid for a digital asset, including transaction fees paid at the time of acquisition. When you sell or otherwise dispose of a crypto asset, your taxable gain or loss equals the difference between your proceeds (what you received) and your basis (what you paid). If your proceeds exceed your basis, you have a gain. If your basis exceeds your proceeds, you have a loss.
The complexity in crypto arises because most investors buy the same asset multiple times at different prices. If you bought 1 BTC in January 2024 at $42,000 and another 1 BTC in November 2025 at $95,000, and then sold 1 BTC in December 2025 for $100,000. Which purchase lot are you selling? The answer depends on your cost basis method.
What Is FIFO and How Does It Work for Crypto?
FIFO stands for first in, first out. Under FIFO, the oldest lot of a particular digital asset is treated as the first one sold. FIFO is the default cost basis method for cryptocurrency if you have not made a specific election.
Using the example above: under FIFO, you are selling the January 2024 lot purchased at $42,000. Your gain is $58,000 ($100,000 minus $42,000), and it qualifies as long-term because you held for over one year.
When FIFO Works Well
FIFO is simple, consistent, and does not require active lot selection for each transaction. For investors who accumulated crypto over a long period and are now selling, FIFO will typically match older (lower cost) lots first. The trade-off is that in a rising market, FIFO produces the largest reported gains because your cheapest lots sell first.
However, because FIFO matches older lots, it also produces the longest holding periods. At the federal level, this can be advantageous because long-term capital gains rates (0%, 15%, or 20%) are lower than short-term rates (up to 37%). The question is whether the lower rate on a larger gain produces a smaller tax bill than a higher rate on a smaller gain under Specific ID, and that depends on your specific bracket and situation.
When FIFO Works Against You
FIFO applies the earliest acquired units to completed dispositions when valid specific identification is unavailable. The resulting basis and holding period are mechanical consequences of the records, not a transaction recommendation.
What Is Specific Identification and How Does It Work for Crypto?
Specific Identification allows you to designate exactly which purchase lot is being sold in each transaction. Instead of mechanically selling the oldest lot, you choose which lot to dispose of based on your tax planning objectives.
Using the same example: under Specific ID, you could designate the November 2025 lot purchased at $95,000. Your gain would be $5,000 ($100,000 minus $95,000), and it would be short-term because you held for less than one year.
When Specific ID Produces Better Tax Outcomes
Specific identification can produce a different basis and holding period from FIFO when the taxpayer made a timely, supportable identification for a completed disposition. Monaco CPA reports documented completed transactions; it does not select lots or recommend sales.
For active traders and investors with complex portfolios, Specific ID is a powerful tool, but it comes with documentation requirements that FIFO does not.
The Documentation Requirement for Specific ID
Under IRS regulations, you must identify the specific lot being sold before or at the time of the sale. Retroactive selection (picking the most favorable lot after the fact) is not permitted.
For TY2025, Notice 2025-7 (issued December 31, 2024) provides important temporary relief: taxpayers may make adequate identification of specific lots on their own books and records rather than needing to communicate specific lot selections to the broker, because most brokers did not have the technology to accept specific identification instructions by January 1, 2025.
This relief was originally set to expire December 31, 2025, but was extended through December 31, 2026 by IRS Notice 2026-20 (issued March 2026). The notice extends eligible book-and-record identification methods; it does not impose a broker technology deadline. Unless later guidance changes the rule, adequate identification after the relief period must satisfy the final regulation, including timely communication to the custodial broker using identifiers the broker designates as sufficiently specific.
The Timing Requirement for Specific ID
Section 5.02(4)(a) of Rev. Proc. 2024-28 explicitly requires that specific unit allocation documentation be completed before the date and time of the first sale, disposition, or transfer of that asset type on or after January 1, 2025, or by the return due date including extensions, whichever is earlier.
This is a regulatory requirement, not a conservative interpretation. If you traded Bitcoin at 10:00 AM on January 10, 2025, your Bitcoin allocation had to be locked in before that exact moment. Locking in your allocation at 5:00 PM the same day is a position you may need to defend. Contemporaneous pre-trade documentation is the only approach that eliminates the retroactive cherry-picking argument entirely.
FIFO vs. Specific Identification: Which Is Better for Crypto Cost Basis?
There is no universally better method. The answer depends on your portfolio, your trading activity, and your tax situation.
Choose FIFO if: You have a small number of lots, you are not an active trader, you prefer simplicity, or your oldest lots are long-term and the preferential federal rate outweighs the larger gain amount.
Specific-identification education: This method requires timely, supportable lot identification and complete records. Whether it is available and appropriate depends on the facts; Monaco CPA does not choose investments or recommend transactions.
The NJ consideration: New Jersey has no preferential long-term capital-gain rate. A valid basis method can change the reported gain on a completed disposition, but this article does not recommend a method or transaction. For the full NJ analysis: How New Jersey Taxes Your Crypto: A State-by-State Gap That Catches NJ Investors Off Guard.
What Is the Per-Wallet Basis Tracking Rule?
Starting January 1, 2025, Treas. Reg. §1.1012-1(j) requires that crypto cost basis be tracked per wallet and per account (Rev. Proc. 2024-28 supplies the one-time safe harbor for allocating pre-2025 basis). This is the single biggest structural change to crypto tax accounting in years, and many investors are unaware of it.
Before 2025, it was common practice for investors to aggregate basis across all wallets and exchanges as one pool. That is no longer permitted. If you held BTC on Coinbase, BTC on Kraken, and BTC on a Ledger hardware wallet, those are three separate basis pools. The lot matching for each sale must be done within the specific account or wallet where the sale occurred.
How Does Per-Wallet Tracking Affect Transferred Assets?
When you transfer crypto from one wallet to another, the original basis and acquisition date travel with the asset to the receiving account. The transferred lot becomes part of the receiving account's basis pool. But it remains a distinct lot. It does not merge with or average into other lots already in that account.
If you bought 1 BTC on Kraken for $40,000 and transferred it to Coinbase, the $40,000 basis is now tracked within the Coinbase basis pool. If you also bought 1 BTC directly on Coinbase for $90,000, you have two separate lots in the Coinbase account. Under FIFO within the Coinbase account, the transferred Kraken lot would sell first (if it was acquired earlier). Under Specific ID, you could choose either lot.
The Safe Harbor Allocation Methods
Rev. Proc. 2024-28 provides a safe harbor with two methods for assigning pre-2025 unrealized basis to specific wallets and accounts as of January 1, 2025. Section 3.10 defines "as of January 1, 2025" as immediately after the close of the taxpayer's day on December 31, 2024.
Global Allocation: You allocate unused basis across wallets and accounts using a documented methodology. Critical requirement: the methodology must have been documented in your books and records before January 1, 2025. If you did not document your methodology before that date, you cannot elect Global Allocation retroactively. The actual mathematical application must be completed by the later of the date and time of the first 2025 transaction in that asset type or the return due date including extensions, per Section 5.02(5)(b).
Specific Unit Allocation: You assign specific purchase lots to specific wallets and accounts. The documentation must be completed before the date and time of the first sale, disposition, or transfer of that asset type on or after January 1, 2025, or by the return due date including extensions, whichever is earlier, per Section 5.02(4)(a). Separately, Notice 2025-7 as extended by Notice 2026-20 permits identification of eligible broker-custodied units sold, disposed of, or transferred through December 31, 2026 either in the taxpayer's books and records no later than the transaction time or through a sufficiently specific standing order recorded before the transaction.
What Changes for Sales After 2025?
For sales after 2025, a broker generally must report adjusted basis only for a covered security acquired after 2025 through a qualifying acquisition in the broker-custodial account and held there until the broker effects the disposition. A broker may voluntarily report basis for a noncovered security, while optional reporting methods for qualifying stablecoin and NFT sales can omit basis.
Because "covered" is narrow, basis reporting remains nonmandatory for the following lots even after 2025:
- Assets acquired before January 1, 2026: these are noncovered regardless of where they are held
- Assets transferred in from another wallet or exchange: noncovered on the receiving platform because the broker does not have the original purchase data
- Units acquired outside a qualifying broker-custodial acquisition: this may include units from DeFi, self-custody staking, airdrops, or mining, depending on how they entered the account
- Assets on platforms that are not reporting brokers: decentralized exchanges, non-custodial wallets, and platforms outside the U.S. reporting system
Required basis can therefore remain absent from Form 1099-DA well beyond the first year. A broker may voluntarily report noncovered basis, but when it is omitted you must supply supported basis on Form 8949. Your wallet history and exchange records from prior years remain essential.
For a full walkthrough of how to handle blank basis on your TY2025 1099-DA, including the correct Form 8949 codes and adjustment mechanics: The 1099-DA $0 Basis Trap: What Crypto Investors and CPAs Need to Know for Tax Year 2025.
How Do I Rebuild My Crypto Cost Basis for My TY2025 Return?
If you are filing now and need to reconstruct blank basis or correct an unsupported $0 on your 1099-DA, here is the framework by acquisition type.
Centralized Exchange Purchases
Download your full transaction history CSV from every exchange. Your purchase price plus buy-side transaction fees equals your basis for each lot. Match each sale on your 1099-DA to the corresponding purchase lot using your elected method (FIFO or Specific ID) within each account separately under the per-wallet rule.
Transferred-In Assets
Go back to the originating platform or wallet. Find the original purchase record for the specific lot that was transferred. Carry that basis and acquisition date to the receiving platform. Boxes 12a and 12b on your 1099-DA flag transferred-in assets. Treat these as high priority for basis reconstruction.
Staking and Earn Rewards
Your basis equals the fair market value of the tokens at the time of receipt. This is also the amount that should have been reported as ordinary income - under Rev. Rul. 2023-14 for staking validation rewards, and under general gross-income and accounting-method principles (§61/§451) for exchange earn/lending interest. If you did not track fair market values at the time of each reward, reconstruct them using historical price data.
DeFi Acquisitions
If you acquired a token through a DeFi swap, your basis is the fair market value of the token received at the time of the swap. Under IRS Digital Asset FAQ 72, the gas paid on the swap allocates to the token you disposed of (it reduces the amount realized on that side); it is not added to the received token's basis. Gas on a cash purchase does add to basis (FAQ 56). Track from on-chain records.
Airdrops and Hard Forks
Basis equals the fair market value at the time you gained dominion and control under Rev. Rul. 2019-24. If the token had no market value at receipt, basis may be $0.
For detailed step-by-step instructions including fee handling and common errors, see 1099-DA Shows the Wrong Number. Now What? How to Fix Cost Basis Errors on Your 2025 Crypto Tax Return.
How Does Cost Basis Method Affect Tax-Loss Harvesting?
Cost-basis methods affect reporting of completed transactions. Section 1091 treatment and identification requirements depend on the asset, year, and records; this is not a recommendation to sell or repurchase an asset.
Under Specific ID with adequate identification (Treas. Reg. 1.1012-1(j)), the units you identify control which basis is used; without identification, earliest-acquired ordering applies. Which lot, if any, to sell is a facts-based decision - identification is a reporting mechanic, not a recommended strategy.
The Lummis amendment to extend wash sale rules to digital assets was not included in the One Big Beautiful Bill Act signed July 4, 2025. Standalone bill S. 2207, introduced June 30, 2025, would extend Section 1091 to digital assets if passed. It has not passed for TY2025. Wrapped tokens and liquid staking tokens occupy a fact-specific gray area. Discuss with your CPA before relying on wash sale inapplicability for these specific assets.
How Do I Prepare for the 2026 Mandatory Crypto Basis Reporting Rules?
Here is what you should do now to be ready:
Confirm available identification methods with each broker. Notice 2026-20 extends eligible book-and-record relief through December 31, 2026 but does not guarantee a broker feature or require a broker to accept any identifier a customer chooses. Absent later relief, a taxpayer seeking Specific Identification after that period must timely communicate an identification using identifiers the custodial broker designates as sufficiently specific; otherwise the regulatory default-order rule may apply.
Clean up your transfer records. Every transfer between wallets and exchanges needs documented original basis and acquisition date. Transferred-in assets remain noncovered even after mandatory reporting begins.
Reconcile your pre-2026 holdings. Any asset you still hold as of December 31, 2025 is a noncovered asset requiring self-reported basis whenever you sell it. Lock in those records now while they are accessible.
Set up per-wallet tracking. If you have not already implemented per-wallet and per-account tracking (required under Treas. Reg. §1.1012-1(j); Rev. Proc. 2024-28 is the pre-2025 allocation safe harbor), do it before your first 2026 transaction.
Keep all historical records indefinitely. Your 2020 Coinbase CSV may be the only proof of basis for a lot you sell in 2028. Exchange records, wallet histories, and on-chain data are not guaranteed to be available forever.
Need Help With Crypto Cost Basis?
If you are struggling to reconstruct basis across multiple wallets and exchanges, review 1099-DA reconciliation information or use the contact form to request a written scope. Availability, acceptance, and any result are not promised.
Sources: Rev. Proc. 2024-28 | Notice 2025-7 | IRS Instructions for Form 1099-DA (2025) | IRS Instructions for Form 8949 (2025) | Rev. Rul. 2023-14 | Rev. Rul. 2019-24 | S. 2207, 119th Congress
This article is for informational purposes only and does not constitute tax advice. Tax outcomes depend on your specific facts and circumstances.
Greg Monaco, CPA | New Jersey CPA license | New Jersey CPA firm registration | 1099-DA reconciliation information | Full-Service CPA: monacocpa.cpa (opens in a new tab)
Frequently Asked Questions About Crypto Cost Basis
What is the default cost basis method for cryptocurrency?
FIFO (first in, first out) is the default if you have not made a specific election. Under FIFO, the oldest lot of each asset is treated as the first one sold.
Can I switch from FIFO to Specific Identification?
You can elect Specific ID prospectively, but you cannot retroactively change the method for transactions that have already been reported. The election must be in place and documented before the transaction occurs.
Do I have to track cost basis separately for each wallet?
Yes. Under Treas. Reg. §1.1012-1(j), effective January 1, 2025, basis must be tracked per wallet and per account (Rev. Proc. 2024-28 is the safe harbor for allocating pre-2025 basis). You can no longer aggregate basis across all platforms as one pool.
Will my broker report cost basis on the 1099-DA starting in 2026?
For sales after 2025, brokers generally must report basis only for covered securities acquired after 2025 through a qualifying acquisition in the broker-custodial account and held there until disposition. Pre-2026 and transferred-in lots are noncovered, so basis is not required, although a broker may report it voluntarily.
What if I didn't document my basis allocation before January 1, 2025?
If you did not document a Global Allocation methodology before January 1, 2025, you cannot elect that method retroactively. You may still use Specific Unit Allocation, subject to the timing and documentation requirements in Rev. Proc. 2024-28 Section 5.02(4)(a) and the Notice 2025-7 temporary relief.
How do I determine basis for crypto I received as staking rewards?
Basis equals the fair market value of the tokens at the time of receipt, which is also the amount reportable as ordinary income - under Rev. Rul. 2023-14 for staking validation rewards, and under general gross-income and accounting-method principles (§61/§451) for exchange earn/lending interest.
Does HIFO (highest in, first out) work for crypto cost basis?
HIFO is not a formally recognized IRS method. A completed sale may use specific identification only when its timing and documentation requirements are satisfied; Monaco CPA does not designate lots or recommend a transaction.
What happens to my cost basis when I transfer crypto between my own wallets?
Transfers between your own wallets are not taxable events. The original cost basis and acquisition date travel with the asset to the receiving wallet. Under the per-wallet basis rule (Treas. Reg. §1.1012-1(j)), the transferred lot becomes part of the receiving wallet's basis pool as a distinct lot.
Can I use average cost basis for cryptocurrency?
No. The IRS does not permit average cost basis for cryptocurrency. Average cost is allowed only for mutual fund shares and certain dividend reinvestment plans under IRC Section 1012. For crypto, you must use either FIFO (default) or Specific Identification.
How do I choose a cost basis method if I have never elected one?
If you have never made a specific election, FIFO applies by default to all your crypto transactions. To switch to Specific Identification, you must make the election prospectively and document your lot selections before or at the time of each sale. You cannot retroactively change the method for previously reported transactions.
Related reading: 1099-DA Basis Trap | How to Fix Cost Basis Errors | NJ Crypto Tax Guide | Crypto Tax Services
Ready to File With Confidence?
Tax rules change frequently. Use the contact form to request a written scope; submitting it does not promise a call, engagement, or outcome. Greg Monaco is a NJ-licensed CPA and the firm's sole practitioner.
