Cost Basis

Understanding 'Cost Basis' in Option Trading with Cryptocurrencies

When stepping into the diverse world of option trading with cryptocurrencies, you’ll encounter a series of terms and jargons that might seem a bit overwhelming at first. Among these, 'Cost Basis' holds a key position. So, what is this all about? Let's delve into it.

What is Cost Basis?

Simply put, the 'Cost Basis' is the original value or purchase price of a cryptocurrency. Here is why it’s significant. Whenever you buy a cryptocurrency, say Bitcoin, the purchased price of the Bitcoin, together with any related acquisition costs, forms your 'Cost Basis'.

Why is Cost Basis Important?

The role of 'Cost Basis' becomes clear during the sale of your cryptocurrency. The difference between the selling price and your original 'Cost Basis' is considered as your gain or loss. Naturally, this data is crucial for calculating and reporting taxes.

Calculating Cost Basis in Cryptocurrency Trading

Remember, when calculating the 'Cost Basis', the transaction fees must also be considered. For example, if you have bought 1 Bitcoin for $9,000 and paid a $100 transaction fee, your 'Cost Basis' for the Bitcoin would be $9,100.

Cost Basis and Option Trading

With regard to option trading, 'Cost Basis' can be more complex. In options, the cost basis includes the premium paid for the option, plus any commissions and fees. For instance, if you bought a Bitcoin call option (betting that the price will rise) for a $500 premium and paid $50 in fees, your cost basis would be $550.

Remember to Keep a Record

In the volatile world of crypto option trading, keeping a clear record of your 'Cost Basis' can save you from legal hassles and unexpected tax liabilities. It comes down to the simple concept of understanding what you have invested and managing your potential returns effectively.

Concluding thoughts on 'Cost Basis'

Any journey into option trading with cryptocurrencies requires a good grip on some basic terms, one of which is 'Cost Basis'. Once you grasp this, you can feel confident in taking on the many other aspects of this trading sphere.