Missing Cost Basis in Crypto: CPA Explains Why It Happens and How to Fix It

Missing cost basis is one of the most common and most costly errors that can happen in crypto tax reporting. Regrettably, many individuals only become aware of their error when faced with an unexpectedly high tax bill or when the IRS comes knocking. In this post, the team at Onchain Accounting will talk about the cost basis, how the mistakes can happen, and most importantly, how a qualified CPA goes about reconstructing transactions and fixing records.

What is Cost Basis?

Simply put, ‘cost basis’ is the term used to represent the original value of an asset for tax purposes. The cost basis is used to calculate your capital gains/losses whenever you dispose of your crypto assets.

For example, if you purchased 1 LTC for $70 and later sold it for $100, your cost basis is $70. In this transaction, your capital gain is calculated by subtracting your cost basis from the selling price. In this trade, your capital gain is $30, and you will be subject to capital gains tax on your $30.

When Do Cost Basis Errors Happen?

Here are some of the main reasons that cost basis goes missing or becomes inaccurate:

Error in wallet-to-wallet transfers—If the transfer of assets between wallets is not properly set up, then many tools may treat it like a taxable event, making it seem like you acquired assets for $0.
The exchange of data is incomplete or lost—Cost basis errors can occur when an exchange shuts down or when historical data is limited or cannot be re-exported. If the old data is gone, the software cannot automatically rebuild the cost basis.
The use of incorrect accounting methods—The wrong use of FIFO and LIFO as well as the sudden changing of methods without proper reconciliation can distort the cost basis calculation.
Rewards misclassification—If rewards and airdrops are not properly classified, it can lead to an overstating of capital gains.
Manual entry errors—Human errors can snowball and compound over thousands of transactions.
Relying solely on automated software—Tax software is extremely helpful, but you must not solely rely on it. If you don’t have a professional cryptocurrency accountant review your transactions, mistakes can slip through the cracks.

How can we fix cost basis errors?

Fortunately, fixing cost basis errors is possible, but it requires structured, professional help. Here are the steps that can be taken to fix cost basis errors:

Reconstruct the full transaction history—The first step is to go back and build a complete timeline of your crypto activity. This will allow you to see how each of your assets was moved over time.
Identify the types of transactions—Determine whether a particular transaction can be considered as a “taxable event” or not. Wallet-to-wallet transfers are often the main culprits for the mislabeling of transactions.
Correctly handle bridging and wrapped tokens—Bridging assets will often require manual cost basis mapping to prevent accounting software from treating new tokens as fresh acquisitions.
Set accurate income values for rewards and airdrops—Make sure to set and accurately record the fair market value of assets received from rewards and airdrops to correct and prevent inflated capital gains calculations.
Apply one consistent accounting method—choose one accounting method and stick to it. Switching methods midstream without proper reconciliation can significantly distort the cost basis.

Conclusion

While a cost basis error can be a costly error in crypto accounting, they are certainly not beyond repair. In most cases, proper analysis, transaction reconstruction, and consistent accounting methods, carried out with the help of a crypto CPA, can help correct these errors—especially when transactions involve sources like the closest Bitcoin ATM in North York, where accurate record-keeping is essential.

At Onchain Accounting, we specialize in resolving missing cost basis and other crypto accounting matters. We make sure that your records are accurate, complete, fully defensible, and IRS-compliant. Don’t let your cost basis errors fester; contact us today to get your crypto taxes in order.