Understanding Taxbit's Cost Basis Engine

Taxbit's cost basis engine takes transaction data and applies tax treatment logic to calculate adjusted proceeds and cost basis for reporting.

Each acquisition creates its own tax lot with a specific acquisition date, adjusted basis, and quantity.

When a taxable disposal occurs, Taxbit identifies which lot or lots are being disposed of and links those acquisitions to the related disposition. The system supports multiple disposition methods, including Specific Lot Identification.

Taxbit can also incorporate user-provided basis for assets transferred onto a platform when the original basis information is not available.

Taxbit's engine is designed to support all of the possible transaction types you may support on your platform.

Digital Asset Cost Basis Considerations

The cost basis calculations completed by Taxbit for digital assets include:

Fee Adjustments

Every buy and sell transaction must be adjusted for associated fees. Generally, fees on acquisitions increase basis and fees on disposals reduce proceeds. This becomes meaningfully more complex when fees are charged in digital assets. The IRS prescribes different rules depending on whether the fee is paid in the same asset as the transaction vs. a different asset entirely — each scenario requires distinct treatment. These adjustments directly affect gain/loss calculations.

Lot-Level Tracking

Each acquisition creates a discrete tax lot with its own acquisition date, adjusted basis, and quantity. When an asset is partially sold, Taxbit splits lots accordingly and tracks remaining balances across the full transaction history.

Lot Selection

When a taxable disposal occurs, the tax engine identifies exactly which lots are being disposed of. This is the core of cost basis calculations: linking specific acquisitions to specific dispositions across a user’s complete transaction history. At volume, this requires processing transactions sequentially and maintaining an accurate, real-time view of all open lots. The selection is ultimately based on the chosen disposition method.

Disposition Method

One example of a disposition method is FIFO (First In, First Out), which means the tax engine must, at the time of every disposal, identify the lot with the oldest acquisition date across the full transaction history and apply it first. This requires evaluating all open lots in the correct order as transactions are processed. FIFO is the default disposition method for Taxbit.

Other methods — HIFO, LIFO, LOFO, specific identification — each apply different selection logic and produce materially different tax outcomes from the same underlying transactions.

Holding Period

Whether a gain is short-term or long-term depends on how long a specific lot was held, which requires accurate acquisition-to-disposition matching.

Covered/Noncovered Determination

Reporting requirements also differ based on whether the asset is considered "covered" or "non-covered." Covered securities — generally those acquired on or after January 1, 2026, or based on the type of acquisition — require the broker to report cost basis to both the IRS and the taxpayer. Noncovered securities do not carry the same broker reporting obligation. Correctly classifying each lot and applying the appropriate reporting rules is a non-trivial, ongoing calculation requirement.

User-Provided Acquisition Information

The IRS allows exchanges to request information from users, providing them with the option to manually input the cost basis for assets transferred onto the platform from an external source. Taxbit supports the ingestion of user-provided basis and incorporates it into all subsequent gain/loss calculations and tax reporting, ensuring that user-declared investment costs are accurately reflected in the output.