Cost Basis Methods Explained

If you bought a token once and sold all of it later, working out your gain is simple. Most wallets are not like that. You buy some, buy more at a different price, sell part, and buy again. When you sell part of a holding built from several purchases, you need a rule for which purchase you are selling. That rule is your cost basis method.

This guide works through one made-up example with each method PONSUM supports, then looks at which methods some countries allow. It is general information: the method you may use is set by your country's rules, not by preference alone.

Why the method matters

Each purchase creates a lot: an amount of a token with its own cost and its own acquisition date. When you sell, the sale is matched with one or more lots. The cost of the matched lots is subtracted from the proceeds to give the gain or loss, and the dates of those lots decide how long you held what you sold.

Different lots can have very different costs. Match the sale with a cheap lot and you show a large gain; match it with an expensive one and you might show a loss. In countries where long-held assets are taxed differently, the lot's date matters as much as its cost.

The example

All prices below are invented to keep the arithmetic easy. Fees are left out.

You hold 3 ETH that cost $7,500 in total, and you sell 1 ETH for $2,800. The question is which ETH you sold.

First in, first out

FIFO matches a sale with your oldest lot first. Here that is the January 2025 purchase at $2,000, so the gain is $800. That lot was held for about 19 months, which makes it long-term in countries that draw a line at one year. FIFO is the most common default, and it is often the method you are assumed to use if you do not choose another.

Last in, first out

LIFO matches a sale with your newest lot first. Here that is the March 2026 purchase at $2,500, so the gain is $300. That lot was held for five months, so the gain is short-term. When prices have been rising, LIFO often shows smaller gains than FIFO, but they tend to be short-term.

Highest in, first out

HIFO matches a sale with your most expensive lot first. Here that is the June 2025 purchase at $3,000, so the sale shows a loss of $200. The lot was held for 14 months, so it is a long-term loss. HIFO tends to produce the smallest gains, but it ignores holding periods, so it is not always the method that leaves the least tax.

Least tax first out

LTFO picks lots in the order that usually leaves the least tax where short-term gains are taxed more heavily. It takes short-term lots that would realize a loss first, then long-term lots at a loss, then long-term lots at a gain, and short-term lots at a gain last. Within each group it picks the lot with the highest cost first.

In the example, the only short-term lot is the March 2026 one, and selling it would realize a gain, so there is no short-term loss to take. The June 2025 lot is long-term and would realize a loss, so LTFO picks it: a long-term loss of $200. Here LTFO and HIFO agree. If the most expensive lot had been a recent one sitting on a gain, they would pick different lots.

Average cost

Average cost pools every unit you hold and gives each the same cost. Your 3 ETH cost $7,500, so each costs $2,500 on average, and the sale shows a gain of $300. After the sale, the remaining 2 ETH keep the average cost of $2,500 each. Canada's adjusted cost base works this way, and some other countries use or allow average cost too.

UK share pooling

The United Kingdom applies share matching rules to crypto assets. A disposal is matched in this order:

1. With acquisitions of the same asset on the same day.
2. With acquisitions in the 30 days after the disposal.
3. With the Section 104 pool, which holds everything else at its average cost.

In the example there were no purchases on the sale day or in the 30 days after it, so the sale is matched with the pool. The pool holds 3 ETH at $7,500, an average of $2,500, so the gain is $300 and the pool keeps 2 ETH at $5,000. If you had bought ETH again within 30 days of 20 August, that later purchase would have been matched first, which could change the result a great deal.

Side by side

The same sale ranges from an $800 gain to a $200 loss. The method also changes the cost of what you still hold, so a lower gain this year can mean a higher one later.

Which methods your country allows

Countries set their own rules, and they change. As of 2026, a few examples:

• United States. FIFO applies unless you identify the specific units you sell, which can allow results like LIFO or HIFO when your records support it. Since 2025 the IRS expects basis to be tracked separately for each wallet or account.
• United Kingdom. Share pooling is required.
• Canada. Average cost, as adjusted cost base, is required for identical properties.
• Australia. You can generally choose the parcel you sell when your records identify it; otherwise FIFO is commonly used.

Many other countries lean towards FIFO or average cost. Once you pick a method, apply it consistently, and talk to an accountant before changing it between years.

How PONSUM helps

When you choose a country in PONSUM, the method menu only offers the methods that country's rules allow, with the usual default selected. The tax summary shows your result under the method you chose and the potential savings compared with the least favourable method allowed, so you can see what the choice is worth before you download anything.

The method is part of every report and part of its ID, and when you anchor a report onchain the method is recorded with it. Anyone checking the report later can see exactly which rule it used.

PONSUM is software, not tax advice. Check your local rules or ask an accountant.