What is cost basis, and how do FIFO, specific identification and average cost differ?

What cost basis means

When a company buys crypto with cash, PwC says the cash paid, including transaction costs, is the crypto's cost.¹ That cost is its cost basis. When the company sells, the realised gain or loss is the difference between the sale price and the cost basis of what it sold, as Deloitte puts it.²

A company often buys the same token at different times and prices. KPMG describes a holding "made up of multiple units of the same cryptoasset purchased at different points in time".⁶ In this module, we call each purchase a lot. When a company sells only some of its units, PwC says it needs a systematic and rational way to identify which units it sold.¹

Three methods

• Specific identification. Match the actual cost to the exact units sold. The IRS describes it as the method for when you can identify and match the actual cost to each item.³
• First in, first out (FIFO). Treat the units bought first as the first ones sold.³
• Average cost. Spread the total cost evenly over all the units held, so each unit carries the same cost. IFRS calls this the weighted average cost formula.^4,2

Specific identification only works if you can tell which units you sold. EY notes that crypto units are fungible, so companies may not be able to tell apart the units in a wallet.⁷

What each rulebook allows

• US GAAP, crypto under ASU 2023-08. The standard does not pick a method. It gives FIFO, specific identification and average cost as examples, and each year a company must disclose the method it uses.^5,2 Deloitte thinks more companies may now use average cost, which was hard to use under the old impairment model.²
• US GAAP, crypto outside ASU 2023-08. Crypto still held at cost less impairment is a different case. EY says average cost doesn't fit there, because it would remeasure units already held. A PwC example also says not to use a weighted average.^7,1
• IFRS. KPMG says IAS 38 is silent on this. If specific units can't be tracked, KPMG's view is to borrow the inventory cost formulas and use average cost or FIFO, applied consistently.⁶ IAS 2 itself uses specific identification for items that are not ordinarily interchangeable, and FIFO or weighted average cost for items that are.⁴

One sale, three gains (our example)

The figures below are our own worked example, using the made-up Brindlecove trades. Lot A is 10,000 TSRN at $2.00 ($20,000). Lot B is 10,000 TSRN at $3.00 ($30,000). Brindlecove then sells 12,000 TSRN at $3.50, for $42,000.^3,4

The sale and its $42,000 are the same in every row. Only the cost matched to it changes, so the gain moves between $8,000 and $16,000.² The method also changes the cost of the 8,000 TSRN left over: $24,000 under FIFO, $16,000 under this specific identification, and $20,000 under average cost.^3,4

Tax is different

Tax rules have their own cost-basis rules. For US tax, for example, the IRS says that if you don't identify specific units, the earliest ones are treated as sold first (first in, first out). Since 2025 this is worked out wallet by wallet or account by account.^8,9 Module 30, Crypto tax basics, covers tax.⁸