Binance Tax Basics: Cost Basis and Wash Sale Rules
Main Takeaways
Cost basis is a fundamental concept in taxation used to calculate the gains or losses on the sale of an asset, such as crypto.
Binance Tax supports four of the most common methods of calculating the cost basis of crypto assets: FIFO, LIFO, ACB, and WAPP.
Wash sale rules stop investors from collecting tax benefits on assets rebought shortly after selling. We are currently working to implement support for wash sale rules on Binance Tax.
Calculating your crypto taxes? Learn the basics of cost basis and wash sale rules and how Binance Tax can help estimate your taxes.
Whether you’re new to crypto investing or a seasoned pro, understanding cost basis and wash sale rules is crucial to avoiding unintended tax mistakes and penalties.
Put simply, the cost basis is the original price of an asset you bought, while wash sale rules stop investors from collecting tax benefits on assets rebought shortly after selling.
In this guide, we’ll cover everything you need to know about cost basis — including four popular methods Binance Tax supports — and wash sale rules.
What is Cost Basis?
Cost basis is a fundamental concept in taxation used to calculate the gains or losses on the sale of an asset, such as stocks or real estate. Crypto assets are no different.
In simple terms, the cost basis represents an asset’s original purchase price plus any additional costs at the time of purchase, such as fees, commissions, or other expenses. For example, when you purchase an asset on Binance, the initial cost basis would include the asset’s purchase price and the 0.1% trading fee on our platform. Gains or losses are then calculated by subtracting the cost basis from the asset’s sale price.
The cost basis of fungible assets, such as stocks or crypto, can be challenging to determine since these assets are typically interchangeable and have no unique identifiers.
In such cases, the method used to calculate the cost basis becomes critical and can significantly impact the amount of taxes owed on the sale of an asset. Crypto traders and investors must understand the various methods available and which are acceptable in their relevant tax jurisdictions.
Four Cost Basis Methods Available on Binance Tax
Binance Tax supports four of the most popular methods to determine the cost basis used by crypto traders and investors: FIFO, LIFO, ACB, and WAPP.
1. First-In, First-Out (FIFO)
FIFO, or First-In, First-Out, assumes that the first assets purchased are also the first assets sold. As a result, the cost basis of the assets sold is based on the purchase price of the oldest assets in one’s portfolio.
For example, let’s assume that an individual purchases 100 tokens of COIN on January 1 and another 100 tokens on February 1. The individual then sells 150 tokens on March 1. Using FIFO, you would assume that the first 100 tokens purchased on January 1 were sold, along with 50 of the tokens purchased on February 1.
The FIFO method is likely the most common across tax jurisdictions as it is relatively easy to calculate. However, it can sometimes result in higher taxes than other methods if the oldest assets have appreciated significantly in value.
2. Last-In, First-Out (LIFO)
LIFO, or Last-In, First-Out, assumes that the last assets purchased are the first assets sold. LIFO can be advantageous when prices rise, allowing you to sell the most recent assets (presumably the higher-cost assets) you bought first. This method generally results in a smaller gain and defers the larger gains until future disposals.
For example, let’s assume that an individual purchases 100 tokens of COIN on January 1 and then another 100 tokens on February 1. The individual then sells 150 tokens on March 1. Using LIFO, you would assume that the last 100 tokens purchased on February 1 were sold, along with 50 of the tokens purchased on January 1.
The LIFO method can be beneficial in certain circumstances where it allows for realizing smaller gains and, as a result, lower taxes. That said, LIFO can also result in lower cost basis values for long-term holdings, ultimately resulting in larger taxes later on.
3. Average Cost Basis (ACB)
ACB, or Average Cost Basis, involves taking the total cost of all assets purchased and dividing it by the total number of assets owned, resulting in an average cost per asset. When the assets are sold, the cost basis is calculated using the average cost per asset.
For example, let’s assume that an individual purchases 100 tokens of COIN on January 1 for 3 USD per token and then another 100 tokens on February 1 for $5 per token. The investment’s total cost is $800 for 200 tokens; therefore, the average cost per token is $4. If the individual later sells 100 tokens for $1,000, the gain under ACB would be $1,000 minus $400 (100 tokens x $4).
The ACB method is straightforward and allows you to automatically average the cost of assets purchased at different prices. However, it’s worth noting that ACB may not always be the most tax-efficient option, particularly if you’ve purchased assets at vastly different prices over an extended period.
4. Weighted Average Purchase Price (WAPP)
WAPP, or Weighted Average Purchase Price, is commonly used in jurisdictions like France, where crypto-to-crypto transactions don’t constitute a taxable event. Taxation is only applicable when crypto is converted into fiat or exchanged for goods/services. WAPP is calculated by taking the total purchase price of all crypto assets in one’s portfolio and multiplying it by the sale price divided by the portfolio’s total value at the date of sale.
For example, let’s assume an individual buys 2 BTC for $30,000 and then exchanges 1 BTC for 10 ETH. The individual then sells 5 ETH for $10,000 when the total portfolio value is $50,000. To calculate the cost basis via WAPP, we would multiply the original purchase price ($30,000) by the sale price ($10,000) divided by the total portfolio value ($50,000)
The subsequent calculation would look like this: 30,000 x 10,000 / 50,000 = 6,000. Therefore, the resulting gain would be $4,000 ($10,000 minus $6,000).
Disclaimer
While Binance Tax supports estimates under all four of the above cost basis methods, it’s important to recognize that your jurisdiction’s tax authority may not accept certain methods. For example, the Internal Revenue Service (IRS) in the United States treats crypto assets as property. This ruling may not be the same in your country.
Before filing your taxes, always verify the correct approach to determining the cost basis with an independent tax professional.
What Are Wash Sale Rules?
Wash sale rules are regulations designed to prevent taxpayers from taking advantage of losses by selling or trading assets at a loss before buying identical assets at the same or a similar price shortly after. These could also be called Bed and Breakfast rules, superficial loss rules, replacement purchase rules, or sale and repurchase rules.
It’s important for traders to understand these rules and how they could affect their tax liabilities. Wash sale rules are not only limited to traditional assets like stocks but also apply to cryptocurrencies.
Dealing with wash sales can vary based on where you are, but some methods include:
Not allowing the loss at all.
Delaying the loss by adjusting the cost basis of assets you just bought.
Force matching the cost basis of the assets you sold to the assets you just bought.
While methods differ, the goal of wash sale rules is generally the same: prevent taxpayers from manipulating investment losses to evade taxes.
Wash Sale Rules on Binance Tax
Binance users should note that Binance Tax does not currently support wash sale rules. We are working on adding support for wash sale rules in future updates.
Disclaimer
You should consult an independent tax advisor to understand the correct approach to wash sale rules in your tax jurisdiction. Ensure you review the estimates in your Binance Tax reports about holding periods and highlight any transactions that fall within such rules to your independent tax advisor.
Try Binance Tax Today
Binance Tax is available on the web version of Binance. With just one click, you can import your Binance transactions, excluding Futures and NFTs, into our calculator and obtain an estimate of your tax obligations according to your jurisdiction.
We’re currently working to implement support for wash sale rules and your favorite networks and wallets outside of Binance. In the meantime, feel free to leave suggestions for improvement on our product feedback board.