Did you pay exchange fees this tax year?
If the answer is yes, you may be able to use your fees to reduce your tax liability.
In this guide, we’ll break down everything you need to know about how exchange fees are taxed and show you an easy way to include fees on your tax return.
What are exchange fees?
Cryptocurrency exchanges often charge their users fees for buying, selling, and transferring their cryptocurrency. Major exchanges like Coinbase, Gemini, and Kraken use these exchange fees to support their business.
Are exchange fees tax deductible?
Businesses can write off exchange fees if they are a necessary expense. However, exchange fees cannot be treated as an itemized deduction for individuals.
However, exchange fees directly related to a trade can be added to your cost basis or subtracted from your gross proceeds, which can potentially reduce your capital gains tax.
How capital gains tax is calculated
To better understand the tax benefits of exchange fees, let’s review the basics of how capital gains tax is calculated.
Typically, crypto investors incur a capital gain or loss when they dispose of their cryptocurrency. To determine their capital gain on these transactions, investors can use the following formula:
Capital gain/loss = Gross Proceeds - Cost Basis
In this formula, gross proceeds is the amount you receive when you dispose of your cryptocurrency. Meanwhile, cost basis is the amount you originally paid for the cryptocurrency.
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For more information on how cryptocurrency taxes are calculated, check out our complete guide to cryptocurrency taxes.
How exchange fees can reduce your capital gains
Paying exchange fees for buying cryptocurrency
Any exchange fees that you pay when you buy cryptocurrency can be added to your cost basis. This can reduce your capital gain or increase your capital loss in the case of a future disposal.
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Paying exchange fees for selling cryptocurrency
Any exchange fees that you pay when you sell cryptocurrency can be subtracted from your gross proceeds. This can reduce your capital gain or increase your capital loss.
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Can transfer fees reduce capital gains?
In the past, the IRS has said that fees can only be added to cost basis or subtracted from gross proceeds in the following scenarios.
1. They are directly related to buying and selling.
2. They increase the underlying value of the asset.
Since transfer fees don’t fall into either category, it’s reasonable to assume that fees for transferring cryptocurrency from one wallet or another do not reduce an individual taxpayer’s liability.
However, businesses may be able to write off transfer fees as an expense if wallet-to-wallet transfers are a necessary part of their operations.
Do the same rules apply for network/gas fees?
Yes. If you paid network/gas fees to carry out a transaction on the blockchain, you may be able to add these fees to your cost basis or reduce them from your gross proceeds if they were directly related to buying or selling an asset.
For more information, check out our guide to network/gas fee taxes.
How do I report exchange fees on my tax return?
Typically, capital gains and losses are reported on Form 8949. Exchange fees can be included within your cost basis and gross proceeds in columns (d) and (e) respectively.
For more information on how to fill out Form 8949, check out our guide to reporting cryptocurrency on your taxes.
How to report exchange fees on your tax return
If you have dozens, hundreds, or even thousands of trades, it can be difficult to keep track of the exchange fees that you’ve paid.
Luckily, there’s an easier way. With CoinLedger, you can automatically import trades from exchanges like Coinbase, Kraken, and Gemini. Once you’ve imported all of your transactions, you can generate a complete tax report which includes relevant exchange fees.
Simplify your crypto tax reporting
For many investors, it’s simply not viable to manually fill out your tax forms. You may have too many transactions or might not have the time to file your taxes by yourself.
Luckily, crypto tax software like CoinLedger can help. More than 300,000 crypto investors trust CoinLedger to help them file their tax returns in minutes.
Get started today and generate a free preview report.
Frequently asked questions
Let’s cap things off by answering a few frequently asked questions about crypto exchange fee taxes.
Should I report cryptocurrency on my taxes?
Yes. In the past, major exchanges like Coinbase and Kraken have been subject to John Doe Summons by the IRS.
Do I pay taxes on cryptocurrency fees?
Cryptocurrency fees will not increase your tax bill. In fact, they can reduce your taxes if they are directly related to buying and selling cryptocurrency.
Do crypto fees count as losses?
Crypto fees cannot be claimed as a capital loss. However, they can be used to reduce your gross proceeds and increase your cost basis, which can reduce your net capital gains.
Can transfer fees reduce my taxes?
It’s likely that fees for transferring cryptocurrency between wallets or exchanges cannot be used to reduce capital gains tax.
As an enthusiast with a deep understanding of cryptocurrency taxation, I can provide valuable insights into the concepts discussed in the article about exchange fees and their impact on taxes. My expertise is grounded in a comprehensive understanding of crypto transactions, taxation regulations, and the practical application of these concepts.
Exchange Fees and Tax Liability: A Comprehensive Guide
Exchange fees are charges imposed by cryptocurrency exchanges such as Coinbase, Gemini, and Kraken for services like buying, selling, and transferring digital assets. These fees play a crucial role in supporting the operational aspects of these major exchanges.
Tax Deductibility of Exchange Fees:
- Businesses can deduct exchange fees as necessary expenses.
- For individuals, exchange fees can't be treated as itemized deductions. However, fees directly related to a trade can be factored into the cost basis or subtracted from gross proceeds, potentially impacting capital gains tax.
Calculation of Capital Gains Tax: Understanding the basics of how capital gains tax is calculated is essential to appreciate the role of exchange fees.
- Capital Gain/Loss = Gross Proceeds - Cost Basis
- Gross proceeds represent the amount received when disposing of cryptocurrency, while cost basis is the original amount paid for the cryptocurrency.
Impact of Exchange Fees on Capital Gains:
- Exchange fees paid when buying cryptocurrency can be added to the cost basis, potentially reducing capital gains or increasing losses upon future disposal.
- Fees paid when selling cryptocurrency can be subtracted from gross proceeds, impacting capital gains or losses.
Transfer Fees and Capital Gains:
- Transfer fees for moving cryptocurrency between wallets generally do not reduce an individual's tax liability.
- Businesses may write off transfer fees if they are integral to their operations.
Network/Gas Fees:
- Similar to transfer fees, network/gas fees can be factored into cost basis or subtracted from gross proceeds if directly related to buying or selling an asset.
Reporting Exchange Fees on Tax Returns:
- Exchange fees can be included in Form 8949 within columns (d) and (e) for cost basis and gross proceeds, respectively.
- Crypto tax reporting tools like CoinLedger offer automation to simplify the process for users with numerous transactions.
FAQs on Crypto Exchange Fee Taxes:
- Reporting cryptocurrency on taxes is essential to comply with IRS regulations.
- Cryptocurrency fees, if directly related to buying and selling, can reduce taxes.
- Crypto fees cannot be claimed as capital losses but can influence gross proceeds and cost basis, impacting net capital gains.
In conclusion, understanding the intricacies of exchange fees and their taxation implications is crucial for crypto investors. Leveraging tools like CoinLedger can streamline the reporting process, ensuring compliance with tax regulations.
