Crypto Cost Basis Explained: FIFO vs Average Cost

When you sell crypto, you owe taxes on the gain — the difference between what you paid and what you sold for. But what you "paid" isn't always simple. If you bought Bitcoin three times at three different prices, which purchase price counts? That's where cost basis methods come in. The two most common methods are FIFO and average cost.

What is cost basis?

Cost basis is the original price you paid for an asset, plus any fees. When you sell, your taxable gain (or loss) is:

Gain = Sale Price − Cost Basis

If you bought 1 ETH for $2,000 and sold it for $3,000, your gain is $1,000. Simple. But what if you bought ETH multiple times at different prices? The cost basis method you use changes how much tax you owe.

FIFO explained (First In, First Out)

FIFO means you sell the coins you bought first. Think of it like a queue — the oldest purchase gets sold first.

FIFO example

Say you made three Bitcoin purchases:

1. January: Buy 0.5 BTC at $40,000 ($20,000 total)
2. March: Buy 0.5 BTC at $50,000 ($25,000 total)
3. June: Buy 0.5 BTC at $45,000 ($22,500 total)

Now you sell 0.5 BTC in September for $55,000. Under FIFO, you sell the January batch first (the oldest). Your cost basis is $20,000. Your gain is $55,000 − $20,000 = $35,000.

If you sold another 0.5 BTC, the next batch (March) would be used — cost basis $25,000.

Average cost explained

The average cost method calculates a single average price across all your purchases. Every coin has the same cost basis — no matter when you bought it.

Average cost example

Same three purchases:

• Total spent: $20,000 + $25,000 + $22,500 = $67,500
• Total BTC: 1.5 BTC
• Average cost per BTC: $67,500 ÷ 1.5 = $45,000

You sell 0.5 BTC for $55,000. Under average cost, your cost basis is 0.5 × $45,000 = $22,500. Your gain is $55,000 − $22,500 = $32,500.

Notice the difference: FIFO gave a $35,000 gain. Average cost gave a $32,500 gain. Same trade, different tax bill.

FIFO vs average cost: side by side

Which method is better for taxes?

It depends on your situation and your country.

• UK investors — HMRC requires the average cost ("section 104 pool") method for most crypto. FIFO is not standard.
• US investors — The IRS accepts both FIFO and average cost for crypto. FIFO is the default if you don't specify. Choosing the right method can legally reduce your tax bill.
• German investors — FIFO is the standard method. This matters because Germany exempts crypto held over one year from capital gains tax.
• Australian investors — The ATO accepts multiple methods. Choose one and stick with it consistently.

The key rule: pick one method and use it consistently. Switching between methods year to year can cause problems with tax authorities.

How Coinlio handles cost basis

Coinlio currently uses the average cost method for all cost basis calculations. This is the simpler method and works for most users in the US, UK, and Australia.

FIFO and LIFO (Last In, First Out) support is planned for a future update. When available, you'll be able to choose your preferred method in settings — and Coinlio will recalculate your P&L and tax reports automatically.

For now, if you need FIFO specifically (German investors, for example), note that Coinlio's tax reports will use average cost. You may want to verify with a local tax tool or accountant.

The bottom line

Cost basis isn't complicated once you see a few examples. FIFO sells your oldest coins first — which can mean bigger gains in a rising market. Average cost smooths everything out — simpler and often better in a bull market. Check your country's rules, pick a method, and let your tracker do the math.

This article is for educational purposes only and does not constitute tax or financial advice. Consult a qualified tax professional for your specific situation.

Coinlio calculates your cost basis automatically — try it free with 3 portfolios. <a href="https://apps.apple.com/app/coinlio/id6761177479">Download on the App Store</a>.