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.

And 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 and in the etoro tax report include this cost basis and sell value for each trade.

When it comes to tax reporting, the 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 costs 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) the user sold.

The cost basis reporting method is generally determined by the investor’s tax country and / or 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.

Note: 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.