Average Cost Basis

The average cost method is an inventory costing method in which the total cost of all the identical goods bought or produced is divided by the number of goods to compute the average cost. In crypto accounting, the average cost method calculates the cost basis of cryptocurrencies by taking the average of all purchase prices.

check the glossary

Average cost basis is an accounting method used to calculate the cost of acquiring multiple units of an asset over varying prices, then determining the average cost per unit. This is often used for tax purposes in the realm of cryptocurrencies when an investor has bought varying quantities of a crypto asset at different prices.

Here's the general formula:

Average Cost Basis = Total Cost of All Units / Total Number of Units

Example:

Now let's use an example:

Suppose in January, you buy 0.5 Bitcoin for $20,000.
Then in March, you buy another 1 Bitcoin for $30,000.
In May, you buy 0.25 Bitcoin for $10,000.

To calculate your average cost basis, you:

Add up the total cost: $20,000 (January) + $30,000 (March) + $10,000 (May) = $60,000.
Then, add up the total Bitcoin you bought: 0.5 (January) + 1 (March) + 0.25 (May) = 1.75 Bitcoin.
Divide the total cost by the total amount of Bitcoin to find your average cost basis: $60,000 / 1.75 Bitcoin = $34,285.71.

So, your average cost basis is $34,285.71 per Bitcoin.

Why is this useful? If you sell a Bitcoin and you need to report your capital gains or losses for tax purposes, you will need to know your cost basis. By using the average cost basis, it's easier to manage when you have bought the same crypto asset at different times and prices.

However, different jurisdictions may have specific rules about how to calculate and report cost basis. Always check with a tax professional if you're unsure.

‍

Average Cost Basis

Example:

Related Terms:

Category: