Cost Basis Methods for Crypto: FIFO, LIFO, and Average Cost Explained

What Is Cost Basis?

When you sell crypto and need to calculate your gain or loss, you need to know what you originally paid for it — this is your cost basis. Simple, right? Not quite. If you have been DCA-ing into Bitcoin weekly for a year, you have 52 different purchase prices. When you sell some Bitcoin, which purchase price do you use?

This is where cost basis methods come in.

The Three Main Methods

1. FIFO (First In, First Out)

The oldest coins you bought are considered the first ones sold. If you bought Bitcoin at $20,000 in January and $30,000 in June, and sell some in December, your cost basis is $20,000 (the first purchase).

Pros: Simple, widely accepted, standard in most jurisdictions

Cons: In a rising market, this means higher taxable gains (since your oldest purchases are usually cheapest)

2. LIFO (Last In, First Out)

The newest coins you bought are considered the first ones sold. Using the same example, your cost basis would be $30,000 (the most recent purchase).

Pros: In a rising market, this results in lower taxable gains

Cons: Not accepted in all jurisdictions, can be complicated to track

3. Average Cost (ACB - Adjusted Cost Base)

You calculate the average price of all your purchases. If you bought 0.5 BTC at $20,000 and 0.5 BTC at $30,000, your average cost basis is $25,000 per BTC.

Pros: Simplest to calculate, especially for frequent DCA investors

Cons: May not minimize tax in all situations

Comparison Example

Purchase	Amount	Price	Total Cost
January	0.1 BTC	$20,000	$2,000
April	0.1 BTC	$30,000	$3,000
July	0.1 BTC	$25,000	$2,500

Now you sell 0.1 BTC at $40,000 ($4,000 proceeds):

Method	Cost Basis	Taxable Gain
FIFO	$2,000 (January purchase)	$2,000
LIFO	$2,500 (July purchase)	$1,500
Average Cost	$2,500 (average of all three)	$1,500

Which Method Should You Use?

This depends on your jurisdiction and tax situation. In many countries, FIFO is the default or required method. In Sri Lanka, the regulations are still developing, but keeping records that support any method is the smartest approach.

My Recommendation

Keep records detailed enough to calculate using ANY method. This gives you flexibility when regulations are clarified. At minimum, record every transaction with date, amount, price, and fees.

Use our tools page for tracking resources.

Disclaimer: This is educational content only and is NOT tax advice. Tax methods and regulations vary by jurisdiction and can change. Always consult a qualified tax professional for advice specific to your situation.