Trading crypto on exchanges and paying transaction fees?

Well we all know that is a common thing!

But what if you tell you a jaw dropping secret, Those exchange fees might help lower your tax bill!

Well yes they do! 

In this guide, we'll explain how exchange fees get taxed and share a simple method to include them on your tax return.

So, which crypto fees can you deduct on your taxes?

Here are some common types of fees you might come across. If any of these fees are part of a transaction, they're usually tax deductible:

• Transaction Fees
• Exchange Fees
• Network Fees (also known as gas fees)
• Wallet Fees
• Conversion Fees
• Listing Fees
• Staking Fees
• DeFi Platform Fees
• NFT Marketplace Fees

Keep in mind, the names and specifics of these fees can vary depending on the network, exchange, wallet, or platform you're using. But as a general rule, if the fee is linked to a transaction's cost, it's likely deductible.

Exchange Fees?

When you use cryptocurrency exchanges like Coinbase, Gemini, or Kraken, you often have to pay fees for buying, selling, or moving your crypto around. These fees help these big exchanges keep their operations running smoothly.

Leveraging Exchange Fees to Reduce Capital Gains Tax

If you're running a business, you can usually write off exchange fees as a necessary expense. But for individuals, exchange fees aren't typically considered an itemized deduction.

However, if you're directly dealing with trades, you might be able to include exchange fees in your cost basis or subtract them from your gross proceeds. This could potentially lower the amount of capital gains tax you pay.

How Capital Gains Tax Works?

To grasp the tax advantages related to exchange fees, let's go over the basics of calculating capital gains tax.

Usually, when crypto investors sell their cryptocurrency, they either make a profit (capital gain) or a loss. To figure out the capital gain or loss, you can use this simple formula:

Capital gain/loss = Disposal Amount - Cost Basis

In this formula, the Disposal amount represents the amount you receive from selling your cryptocurrency. On the other hand, the cost basis is the original price you paid for the cryptocurrency.

For more details on how cryptocurrency taxes are computed, take a look at our comprehensive USA Crypto Tax Guide.

How Exchange Fees Affect Your Capital Gains

• When You Buy Cryptocurrency: If you're paying exchange fees while buying cryptocurrency, you can include those fees in your cost basis. This might lower your capital gain or increase your capital loss when you sell the crypto later on.

• When You Sell Cryptocurrency: Similarly, if you're paying exchange fees when selling cryptocurrency, you can deduct those fees from your Disposal amount. This could also decrease your capital gain or increase your capital loss.

Can Transfer Fees Lower Capital Gains?

Previously, the IRS stated that fees could only affect the cost basis or Disposal Amount under specific circumstances:

• When they're directly tied to buying and selling.
• When they increased the asset's value.

Since transfer fees don't fit into these categories, it's likely that fees for moving cryptocurrency between wallets won't lower an individual's tax responsibility.

However, businesses might be able to deduct transfer fees as an expense if wallet-to-wallet transfers are crucial to their operations.

Are Network/Gas Fees Treated the Same Way?

Yes, similar rules apply. If you've paid network/gas fees to complete a transaction on the blockchain, you might be able to include these fees in your cost basis or subtract them from your disposal amount. This is applicable if the fees were directly linked to buying or selling an asset.

How Should I Report my Exchange Fees in My Tax Form?

You report capital gains and losses on Form 8949. You can add exchange fees to your cost basis in column (d) and deduct them from your disposal amount in column (e).

To learn more about completing Form 8949, take a look at our guide on reporting crypto taxes in the USA. 

How to Include Exchange Fees in Your Tax Filing

Tracking exchange fees for numerous trades can be challenging, especially if you have many transactions.

Fortunately, there's a simpler method. By using Kryptos, you can effortlessly import trades from platforms such as Binace, Coinbase, Kraken and Gemini. Once all your transactions are imported, you can generate a comprehensive tax report that includes the relevant exchange fees.

Make Your Crypto Tax Reporting Easier with Kryptos

Kryptos is Your Personal Crypto Tax Assistant that simplifies crypto taxes. Not only does it effortlessly calculate your crypto taxes such as capital gains, losses, income, and expenses, but it also provides features to optimize your tax position.

Track your unrealized gains and losses with Kryptos, gaining insights into when to HODL and when to make decisions about your investments.

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Kryptos offers support for various cost basis methods, including FIFO, LIFO, and HIFO. You can customize these settings to see how they impact your crypto taxes.

Beyond saving you from hours of spreadsheet work and calculations, Kryptos also cuts down the time spent on form-filling. For US investors, Kryptos generates pre-filled forms ready for submission to the IRS or your tax portal. These include - IRS Form 8949 & Schedule D, TurboTax Report, Tax Act Report, Complete Tax Report. 

Make your crypto tax experience more efficient with Kryptos.

Curious about your crypto tax bill?

The crypto tax you owe is influenced by your yearly income and the duration you've held your crypto. Typically, the higher your annual income, the greater the percentage you'll pay in Capital Gains Tax. Check out the ultimate USA crypto tax guide to learn how to calculate your crypto taxes.

FAQs

1. What types of crypto fees can I deduct on my taxes in the USA?

You can deduct various types of crypto fees on your taxes, including transaction fees, exchange fees, network fees (gas fees), wallet fees, conversion fees, listing fees, staking fees, DeFi platform fees, and NFT marketplace fees.

2. How can exchange fees help reduce my capital gains tax liability?

While exchange fees aren't typically considered an itemized deduction for individuals, you might be able to include them in your cost basis or deduct them from your gross proceeds. Doing so could potentially lower the amount of capital gains tax you owe.

3. Do transfer fees affect capital gains tax in the same way as exchange fees?

Transfer fees, such as those incurred when moving cryptocurrency between wallets, may not directly impact your tax responsibility unless they're essential to business operations. Individuals typically can't lower their tax liability with transfer fees.

4. Are network/gas fees treated similarly to exchange fees for tax purposes?

Yes, similar rules apply to network/gas fees. If these fees are directly linked to buying or selling an asset, you may include them in your cost basis or subtract them from your disposal amount when calculating capital gains or losses for tax purposes

5. How do I report exchange fees on my tax form?

Exchange fees can be reported on Form 8949. You can add them to your cost basis in column (d) and deduct them from your disposal amount in column (e). Utilizing software like Kryptos can simplify the process by importing transactions and generating comprehensive tax reports.

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All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!