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How is cost basis determined for my transactions?
How is cost basis determined for my transactions?

How does ZenLedger determine cost basis? What does HIFO/LIFO/FIFO mean?

Morgan avatar
Written by Morgan
Updated over a week ago

The Gain or Loss in any transaction equals the difference between the value of a coin at the time it was purchased minus the value when you sold or traded the coin. If you buy and sell many coins over time, this can get complicated.

How ZenLedger determines the cost basis of a transaction:

ZenLedger takes the mystery of cost basis away by stitching together your complete trading history based on the cost basis accounting method you select (more information on cost basis methods below).

In order to correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it for one year or less, your capital gain or loss is short-term. Check out this article for more information on capital gains tax and how the IRS taxes crypto.

For any cryptocurrency being taxed, ZenLedger finds the appropriate incoming transaction and then finds its fair market price in US dollars at the time it was bought . It then uses that as the cost basis for the taxable transaction. ZenLedger calculates the fair market value (FMV) at any given timestamp for any given cryptocurrency using market data from various price aggregators like CoinMarketCap and CoinGecko. We integrate directly with them and other third-party APIs that specialize in calculating the fair market value for different cryptocurrencies.

Cost Basis Accounting Methods in ZenLedger

ZenLedger allows users to choose which cost basis method they want applied to their tax calculation. This cost basis method can be changed at any time in your account. Choosing between our supported cost basis accounting methods when running your reports affects the cost basis. If you are unsure which cost basis method to choose, we recommend consulting with a tax professional to determine the best method to stick with for the long-term. When you first open an account with ZenLedger, the default cost basis method will be set to Highest in, First Out (HIFO).

An Overview of FIFO, LIFO, HIFO, and AVG:

  • First In, First Out (FIFO) - cost basis is based on the OLDEST purchase first

  • Last In, First Out (LIFO) - cost basis is based on the NEWEST purchase first

  • Highest In, First Out (HIFO) - cost basis is the HIGHEST value purchase first

  • Average Cost Basis (AVG) - cost basis is an average value of the purchase prices

Step-by-Step Instructions to Change Your Cost Basis Method:

Step 1: Click the hardware button in the top right corner and then click on Settings.

Step 2: Select Tax Settings from the bar on the left-hand side.

Step 3: Using the drop-down menu, select the cost basis accounting method you want used in your account. Once you've made that selection, click Save.

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