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Are Crypto Fees Tax-deductible

Are Crypto Fees Tax-deductible? How Is It Calculated?

Are crypto fees taxable? What are the varied exchange fees? Read the article to understand all about crypto fee tax.

Benjamin Franklin once said, “In this world, nothing is certain except death and taxes.” While what the wise man said is completely true and we cannot ditch death, we can certainly save some money on crypto taxes. How?

For an avid crypto investor/trader, crypto fees are nothing novel. They also know about paying taxes when they sell or exchange any crypto token and simultaneously, they have to pay a fee for all their transactions. So, this begs a few questions such as are crypto fees taxable? Can you deduct transaction fees from your taxes? We bear glad tidings by informing you that crypto fees are deductible from the final proceeds of a digital asset. 

But, we have to bear in mind that crypto fees come in many forms. Let’s see how we can handle crypto fees concerning taxes. But first, let’s briefly touch upon what crypto fees actually are?

What are Crypto Fees?

Fees can serve as transactional processing fees that help sustain the crypto network. The fee paid by you serves as an incentive to people who keep the network up and running (miners and stakers). There are three main types of fees while investing in crypto: Exchange, wallet, and network fees. Let’s take a closer look at them. 

Exchange Fees

For crypto traders, a buyer has to open an account on exchanges such as Binance, Gemini, Kraken, Coinbase, and more. These exchanges make money by charging a fee for offering buy/sell/exchange services. Crypto exchanges charge several types of fees, such as:

  • Trading fees: Charged for buying/selling tokens on a crypto trading platform.
  • Conversion fees: This fee is charged for swapping fiat currencies before making a trade. 
  • Withdrawal fees: A flat fee paid by the user for moving the crypto tokens out of their accounts. Oftentimes, the fee is also affected based on the country of your residence or the withdrawal type.
  • Interest / Liquidation / Borrowing fees : A few crypto exchanges provide crypto margin trading, which includes borrowing additional funds to create leverage and Improve your position. These exchanges usually charge extra fees depending on the amount loaned out on margin and the interest rate is based on the available funds.  Moreover, a crashed trade and the liquidation of your position may cause you to pay extra fees. 
  • Deposit fees: The crypto deposit fee depends on the sort of deposit but usually, crypto exchanges don’t charge deposit fees as they want to encourage users to deposit funds on their platform. 

Transfer Fees

A transfer fee also called a wallet fee ensues when a user transfers crypto between wallets. 

How Much are Crypto Transfer Fees?

Paying transfer fees varies from exchange to exchange and if you are using more than one exchange for trading, keeping track of the fees might be a bit challenging. For instance, you might be paying fees in tokens such as ETH or BTC. 

Also, nowadays, paying fees in a trading platform’s native coin has become commonplace. Binance users can pay fees with BNB and Kraken users with Karen Fee (KFEE). The primary benefit of using an exchange’s native coin is that users often get discounts on transfer fees.  

So, Are Crypto Fees Tax Deductible?

Yes, as we’ve mentioned earlier, crypto trading fees can be deducted from your taxes. When you are involved in buying/selling/exchanging virtual coins any sort of fees related to the transaction is deductible from the proceeds. Confused? Let’s make it easier with an example.  

Dave buys 1 Bitcoin for $10,000 and pays $500 as fees for the transaction. So, as per the IRS, the cost basis is 10,500. The value of Bitcoin has to go up for you to realize taxable gains and if the value plummets, you will realize losses.  

After some time, Dave decided that he wanted to sell that 1 Bitcoin and he sold it for $11,000 and paid $500 as fees for the transaction. Now, the IRS allows Dave to deduct $500 from the proceeds and pay taxes on $10,500. 

If Dave doesn’t account for the fees while paying taxes then he has to pay taxes on:

Sales Proceeds – Cost Basis = $11,000 – $10,000 = $1,000.

However, if Dave takes a smart decision and decides to account for the fees then he pays:

Sales Proceeds – Cost Basis = $10,500 – 10,500 = $0 leaving him with no taxable gains. 

Is There an Easier Way to Sort Your Crypto Taxes?

Sorting out your crypto taxes can become a nightmare if you are a beginner and you don’t know what to do. Even experienced traders can get confused due to the sheer number of their transactions. In this scenario, Zenledger comes to the rescue. What is ZenLedger you ask? 

ZenLedger is a leading cryptocurrency tax platform that has been helping its users save money and be IRS compliant since 2017. With ZenLedger, you can not only create your crypto tax reports but also monitor your asset portfolio. This platform is compatible with LIFO, HIFO, and FIFO reporting methods. It automatically calculates your cost basis, fair value, gains, and losses, and populates your tax forms with the correct data.

Final Thoughts

Well, the answer to the question “is crypto fee tax deductible” really comes down to how well you keep track of your transactions and the fees associated with it. If you are a HODLer and don’t sell often, it might be easy for you to track your transactions and fees but if you are a trader and have a truckload of transactions, we highly recommend you take a look at ZenLedger. 

Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Are Crypto Fees Taxable? – FAQs

1. Can you deduct transaction fees from your taxes?

Yes, you can definitely deduct crypto transaction fees from your taxes from the final sale price of your tokens.

2. How are transaction fees deducted from taxes?

If someone buys a cryptocurrency for $1,000 and pays $50 as fees, the cost basis becomes $1,050, and if they sell the coin after a few months for $1100 and pay $50 for it again. The IRS allows the trader to deduct $50 from the proceeds and pay taxes on $1,050. The transaction would look like this:
Sales Proceeds – Cost Basis = $1,050 – $1,050 = $0 with no taxable gains.

3. Are crypto fees high?

It totally depends on the crypto exchange you are leveraging to buy/sell crypto. Typically, crypto exchanges make money by charging fees to the users. On some exchanges, the fee is charged in BTC or ETH while some exchanges charge fees with their own native coin. For instance, Binance users can pay fees with BNB and Kraken users with Karen Fee (KFEE). The primary benefit of using an exchange’s native coin is that users often get discounts on transfer fees.