The IRS requires cryptocurrency to be valued at fair market value on the date of each transaction. For assets traded on multiple exchanges 24/7 with prices that vary across platforms, determining "fair market value" is not as simple as it sounds.

Fair Market Value Determination

The IRS defines fair market value as the price at which property would change hands between a willing buyer and willing seller. For cryptocurrency, this is typically the price on the exchange where the transaction occurred at the time of the transaction. If the transaction happened off-exchange — a peer-to-peer sale, a payment for services — the fair market value is the price on a major exchange at the time of the transaction.

Cost Basis Methods

When you sell crypto, your gain is the difference between the sale price and your cost basis. If you bought Bitcoin at different prices over time, you need a method for determining which Bitcoin you sold. FIFO (First In, First Out) assumes you sold the oldest coins first. Specific identification allows you to choose which lot you sold. HIFO (Highest In, First Out) minimizes gains by assuming you sold the most expensive coins first. The method must be applied consistently and documented.

Missing Cost Basis

If you cannot determine your cost basis — you lost records, the exchange closed, you received crypto years ago — the IRS default position is zero cost basis, meaning the entire sale proceeds are taxable gain. This is often dramatically wrong. Reconstruction methods exist: exchange records, blockchain history, email confirmations, bank statements showing purchases. Even without perfect records, the Cohan rule allows reasonable estimates when the taxpayer can demonstrate that expenses were incurred.

Valuation for OIC Purposes

When the IRS evaluates an Offer in Compromise, they value your crypto holdings at current fair market value with a quick-sale discount of approximately 20%. This is different from the taxable event valuation. A crypto portfolio worth $100,000 today has an OIC equity value of approximately $80,000. If the portfolio has declined significantly since the taxable events that created your debt, this works heavily in your favor.

Getting Valuation Right

Valuation errors — using the wrong date, the wrong exchange price, the wrong cost basis method — can result in dramatically incorrect tax liability. Attorney Darrin T. Mish ensures your crypto is valued correctly both for return preparation and for resolution purposes. The difference between correct and incorrect valuation can be tens of thousands of dollars.