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Fundamentals: Cost Basis and Holding Period
Manage episode 352280325 series 3428825
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Cost basis and holding period are the two inputs that determine the tax impact of a capital asset transaction, including crypto assets.
Cost basis is an important concept as it determines your gain or loss when you arrive at a taxable crypto transaction. The automated tax software currently available for crypto accountants and investors is lacking in its ability to track basis across platforms. The software cannot know whether it has complete information or not, and sometimes comes to erroneous conclusions about basis in the face of DeFi transactions or users who interact with multiple exchanges or blockchains. Additionally, these programs will often pull in the data on pricing automatically, and it can be off by a significant margin. A prime example of this is when a user receives an airdrop of a coin that was traded on an exchange with low volume to artificially inflate the spot price. Since the software pulls in the best available data, it could think that a shitcoin airdrop you received was worth millions, when it was in fact effectively worthless. When the software can not automatically determine cost basis, it will default to a zero, a costly mistake. This is where much of the opportunity lies for practitioners serving the industry - accurately tracking basis.
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