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Cost basis is a fundamental concept in taxation used to calculate profit or loss when selling an asset such as cryptocurrency.
Binance Tax supports the four most common methods for calculating the underlying value of crypto assets: FIFO, LIFO, ACB, and WAPP.
Wash trading rules prevent investors from receiving tax benefits on assets they acquired shortly after selling identical assets. We are working on adding wash trading rules to Binance Tax.
Trying to calculate taxes on cryptocurrencies? Learn more about base costs and wash trading rules, and how Binance Tax helps you determine your taxes.
Basis calculation methods and wash trading rules are important concepts for both new and experienced investors who want to avoid tax mistakes and penalties.
In short, cost basis is the original price of the asset purchased. And wash trading rules prevent investors from receiving tax benefits on assets they acquired shortly after selling identical assets.
In this guide, we'll cover how to determine your cost basis—including four popular methods on Binance Tax—and how wash trading rules work.
What is the base cost
Cost basis is a fundamental concept in taxation used to calculate the gain or loss on the sale of an asset. It is also suitable for cryptocurrencies.
Simply put, the cost basis is the original purchase price of the asset plus any additional costs at the time of purchase, such as commissions, fees or other expenses. For example, when you buy an asset on Binance, the initial cost basis includes the asset's purchase price and the platform's 0.1% trading fee. Profit or loss is calculated by subtracting the underlying cost from the selling price of the asset.
The underlying value of fungible assets such as stocks or cryptocurrencies is not so easy to determine. After all, these assets do not differ from equivalent units and do not have unique identifiers.
There are several methods for determining the base cost. Each of them can significantly affect the amount of taxes on the sale of an asset. Therefore, cryptocurrency traders and investors need to understand the available options and determine which ones are suitable for the desired tax jurisdiction.
Four Methods to Calculate Base Value on Binance Tax
Binance Tax supports the four most common methods for determining the underlying value of crypto assets: FIFO, LIFO, ACB, and WAPP.
1. FIFO (first come, first serve)
FIFO (First-In, First-Out) means that the assets that were purchased first are also sold first. Therefore, the basis of the value of the assets sold depends on the purchase price of the oldest assets in the portfolio.
Let's assume that a user purchases 100 COIN tokens on January 1st, and then another 100 tokens on February 1st. He then sells 150 tokens on March 1st. Based on the FIFO method, he sold 100 tokens purchased on January 1st, as well as 50 tokens purchased on February 1st.
The FIFO method is considered the most common in tax jurisdictions. It is also relatively easy to calculate. But if the old assets have appreciated significantly, taxes may be higher under this calculation than under other methods.
2. LIFO (in reverse order of arrival)
LIFO (Last-In, First-Out) means that the assets that were purchased last are sold first. This method can be advantageous when prices rise because it allows new assets (presumably more expensive ones) to be sold first. In general, LIFO generates less profit and defers large profits to the future.
Let's assume that a user purchases 100 COIN tokens on January 1st, and then another 100 tokens on February 1st. He then sells 150 tokens on March 1st. Based on the LIFO method, he sold 100 tokens purchased on February 1st, as well as 50 tokens purchased on January 1st.
The LIFO method can be useful when it is more profitable for you to earn less and, accordingly, pay less taxes. However, LIFO has the potential to reduce the cost basis of long-term assets, resulting in higher taxes in the future.
3. ACB (Average Cost Base)
ACB (Average Cost Basis) involves you determining the total cost of all assets purchased and then dividing it by your total assets. The result is the average cost of one asset. When you sell an asset, the cost basis is calculated using the average cost of one asset.
Let's assume that a user purchases 100 COIN tokens on January 1st for $3 per token, and then another 100 tokens on February 1st for $5 per token. In total, he invested $800 in 200 tokens. It turns out that the average cost of one token is $4. Based on the ACB method, if this user sells 100 tokens for $1000, his income will be $1000 minus $400 (100 tokens x $4).
The ACB method allows you to easily average the cost of assets purchased at different prices. However, the tax on it is not always beneficial, especially if you bought assets over a long period and at significantly different prices.
4. WAPP (weighted average purchase price)
WAPP (Weighted Average Purchase Price) is commonly used in jurisdictions like France, where transactions between cryptocurrencies are not taxed. In this case, cryptocurrencies are taxed only when they are converted into fiat or exchanged for goods/services. To calculate WAPP, the total purchase price of all cryptoassets in the portfolio must be multiplied by the sale price divided by the total value of the portfolio on the date of sale.
Let's assume that a user purchases 2 BTC for $30,000 and then exchanges 1 BTC for 10 ETH. He then sells 5 ETH for $10,000 when the total portfolio value is $50,000. To calculate the WAPP tax, you need to multiply the original purchase price ($30,000) by the sale price ($10,000) divided by the total portfolio value ($50,000) .
The calculation would look like this: 30,000 x 10,000 / 50,000 = 6,000. So the profit is $4,000 ($10,000 minus $6,000).
Denial of responsibility
Binance Tax supports all four base cost calculation methods. However, it is important to understand that the tax authority in your jurisdiction may not accept some of them. For example, the US Internal Revenue Service (IRS) considers cryptocurrency assets to be property. In your country, the attitude towards cryptocurrencies may be different.
Before filing your tax return, consult an independent tax professional to ensure you select the acceptable method of calculation.
What are wash trading rules?
Wash trading rules are methods to combat tax evasion. They do not allow users to sell or exchange assets at a loss and then buy the same assets at the same or similar price. They can also be called sale and repurchase rules.
It is important for traders to understand these rules and how they may impact tax obligations. Wash trading rules apply not only to traditional assets like stocks, but also to cryptocurrencies.
Various methods can be used to combat wash trading:
Avoid losses at all.
Defer losses by adjusting the cost basis of the assets you just purchased.
Compare the underlying cost of assets sold with those just purchased.
The methods may vary, but their goal is the same - to prevent taxpayers from manipulating investment losses to evade taxes.
Wash trading rules on Binance Tax
At the moment, Binance Tax does not have wash trading rules. We are working to add them in future updates.
Denial of responsibility
Consult an independent tax professional to understand the approach to wash trading rules in your tax jurisdiction. Review your calculations in Binance Tax's holding period reports and speak with an independent tax professional about any transactions that fall within the applicable rules.
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We are working to add support for wash trading rules, as well as your favorite networks and wallets outside of Binance. If you have suggestions for improvement, please leave them on the product review page.
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Additional Information
Introducing Binance Tax: Simplify Your Life When Preparing Your Taxes
Why Paying Taxes on Cryptocurrency Transactions Helps You and the Industry Web3
How to Prepare Tax Reports Using Binance Tax