Average Cost Basis for Crypto: How It Works and When to Use It

If you have ever bought the same cryptocurrency at different prices over time, you have faced the cost basis question: when you sell, which purchase price do you use to calculate your gain or loss?

Most crypto tax software defaults to FIFO (First In, First Out), and for many traders that works fine. But there is another method that is simpler, often more intuitive, and required in several major jurisdictions: the average cost basis method.

What Is Average Cost Basis?

The average cost basis method calculates your cost per unit by dividing the total cost of all units you own by the total number of units. Every time you sell, you use that single averaged cost — regardless of when you originally bought each unit.

Here is a simple example:

• January: Buy 1 ETH at $2,000
• March: Buy 1 ETH at $3,000
• June: Sell 1 ETH at $3,500

Your average cost basis is ($2,000 + $3,000) / 2 = $2,500 per ETH. When you sell 1 ETH at $3,500, your gain is $1,000 — regardless of whether you conceptually sold the "first" or "second" ETH.

How It Compares to Other Methods

There are four common cost basis methods in crypto tax accounting:

• FIFO (First In, First Out) — Sells your oldest units first. This is the IRS default if you do not specify a method. In a rising market, FIFO tends to produce the highest gains because your cheapest units are sold first.
• LIFO (Last In, First Out) — Sells your newest units first. In a rising market, this can reduce short-term gains because your most expensive recent purchases are sold first.
• HIFO (Highest In, First Out) — Sells your most expensive units first. This minimizes gains (or maximizes losses) on every disposal, making it the most tax-efficient method in most scenarios.
• Average Cost — Uses the pooled average cost for every sale. The result falls somewhere between FIFO and HIFO. It is the simplest to understand and audit.

When Average Cost Makes Sense

Average cost is particularly useful in these situations:

• High-frequency DCA (Dollar Cost Averaging) — If you buy weekly or daily, tracking hundreds of individual lots is cumbersome. Average cost collapses them into one number.
• Staking rewards — Validators and delegators receive small amounts of crypto constantly. Average cost handles this naturally without creating thousands of individual lots.
• Simplicity for accountants — If your CPA is not crypto-native, average cost is the easiest method to explain and verify.
• Tax planning predictability — Because the cost basis only changes when you acquire new units, it is easier to estimate your tax liability before you sell.

Which Jurisdictions Require or Prefer It

Average cost is not just an option — in several countries it is the only permitted method:

• Canada — The CRA requires the Adjusted Cost Base (ACB) method, which is a form of average cost. FIFO and LIFO are not permitted. See our ACB guide for Canadian filers.
• United Kingdom — HMRC uses a "pooled cost" approach that is effectively average cost, with additional same-day and 30-day matching rules (the "bed and breakfast" rule).
• Australia — The ATO allows both FIFO and average cost. Many Australian filers choose average cost for its simplicity.
• Italy — Italy uses a weighted average cost method (LIFO is also permitted in some cases).
• Finland — Finland uses average cost as the default for crypto disposals.
• Austria — Austria requires a moving average cost method for crypto held after March 1, 2022.

In the United States, the IRS has not explicitly approved average cost for cryptocurrency (unlike mutual funds, where it is allowed under Section 1012). However, it is commonly used by filers, and many tax professionals accept it. If you are a US filer, discuss with your tax advisor whether average cost is appropriate for your situation.

Important Limitations

Average cost is not always the best choice:

• No cherry-picking — You cannot choose to sell specific high-cost lots to minimize a particular sale's gain. Every sale uses the same averaged cost.
• No long-term/short-term optimization — Because you cannot identify specific lots, you lose the ability to strategically sell long-term holdings (taxed at lower capital gains rates) versus short-term holdings.
• Method lock-in — In some jurisdictions, once you start using average cost for an asset, you must continue using it for that asset. Switching methods mid-year creates compliance risk.

How BlockchainSmartTax Helps

We now support the average cost basis method as a first-class option alongside FIFO, LIFO, and HIFO — and it is free on all plans, including the free tier.

To switch:

• Go to Settings → Tax Settings
• Select Average Cost from the cost basis method dropdown
• Your tax reports, portfolio gains, and lot breakdowns will automatically recalculate

You can switch between methods at any time to compare the tax impact before filing. Our tax reports clearly show which method was used, so your accountant can verify the calculation.

If you are filing in Canada, the UK, Australia, Italy, Finland, or Austria, average cost is not just supported — it is the method your tax authority expects. Create your free account and see how it affects your crypto tax liability.