What is cost basis and how is it relevant to taxes?

When an investor opens a new position, its cost basis is the amount they paid for the asset including any fees at the time they opened it or during the life span of the investment. This amount is recorded as part of the transaction data on their brokerage or crypto trading account.

When the investor closes their position, its profit or loss is calculated by subtracting the cost basis from the amount they sold it for. It is that profit or loss that is most relevant for tax filing purposes.

Realized gain on a closed position = sell value - cost basis (purchase value)

The tax documents that investors share with their tax professional or upload to a filing software (e.g. Turbotax) include this cost basis and sell value for each trade.

When it comes to tax reporting, cost basis can be determined using one of several methods:

• FIFO: First In First Out: reports cost basis of closed positions by the user's oldest purchase(s) of the corresponding asset.
• LIFO: Last in First Out: reports cost basis of closed position, but users’ most recent purchase(s) of the corresponding asset.
• Specific Identification (Lot): report the cost basis of the exact position (lot) that the user sold.

The cost basis reporting method is generally determined by the investor’s tax professional or by using tax preparation software when computing the transactional trading data.

This is an important decision that may have a material impact on an investor’s tax liabilities.  Investors often determine which method to use based on their capital gains and/or tax loss harvesting strategies.

How does etoro support cost basis reporting?

At etoro, we can support US clients with their reporting according to different cost basis methods via the Account Statement feature, other tax documents, and the cost basis selector.

The cost basis selector enables you to choose the cost basis method you want for your tax report.

To access it, click on this link or follow these steps:

1. Go to Account settings (On the web version of etoro: Click ⚙️ Settings in the left-hand menu, then click on General. On the etoro mobile app: tap on at the top of the screen, then tap Settings ⚙️ and Account).
2. Under Documents, click on “View” next to Tax Reports.

This is provided for informational purposes only. etoro does not provide tax or legal advice. You should consult with a tax or legal professional to address your particular situation.

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