Average Cost Basis Calculation

Average cost basis calculation determines the cost of an asset by taking the total cost of all units purchased and dividing it by the total number of units held. This method smooths out the impact of price volatility by blending the purchase prices over time.

It is particularly useful for assets acquired through frequent, small purchases or recurring investments. When a portion of the holdings is sold, the average cost is used to determine the cost basis for those units.

This approach is generally simpler to maintain than tracking individual tax lots. However, it may not always be the most tax-efficient method depending on market conditions.

It is important to check if the relevant tax jurisdiction permits the use of average cost for digital assets. Once chosen, consistency is typically required.

It helps investors focus on the overall performance of their position rather than individual units.