Bitcoin Cost Basis Purchases

1. As long as the IRS treats bitcoin as property, then whenever you use bitcoin to buy anything you are supposed to consider the capital gain or capital loss. There is no "until it's converted to fiat". You are paying local sales tax and capital gains, or paying local sales tax and reporting capital loss.

2. As long as you are consistent, you can use either the total cost basis, or individual lot purchases. The same as other property like stocks (except without stock specific regulations like wash-sale rules :D ).

There are a lot of perks or unintentional loopholes for speculators, with the property designation. There are a lot of disadvantages for consumers trying to use it like a currency. Someone mixing investment and spending funds across addresses is going to have complicated tax issues, but fortunately the exchanges have records of purchase times and prices, which you can compare with the addresses you control.

Do note, after that IRS guideline, another federal agency designated Bitcoin as a commodity, which is a subset of "property" with its own more favorable but different tax guidelines.