The essentials of accounting for crypto transaction fees

Whether you prefer centralized or decentralized crypto trading platforms, there are plenty of transaction fees you’ll need to pay. But just because these fees are unavoidable doesn’t mean the IRS ignores them when calculating yearly gains and losses. In fact, current federal regulations have a clear set of definitions for digital asset transaction costs, and traders who properly account for them may see a positive difference in their tax obligations.

Accounting for crypto transaction fees can help you estimate your total taxable gain or loss and avoid overstating your gains. In this guide, we’ll walk through five common fee scenarios addressed by the IRS digital asset transaction cost rules.

What are crypto transaction costs?

Whenever you pay a fee to buy, sell, or dispose of crypto, that fee may affect your amount realized, cost basis, or gain or loss calculation. The result depends on what type of transaction you made and which asset was used to pay the fee.

Officially, United States federal regulations define digital asset transaction costs as “amounts paid in cash or property (including digital assets) to effect the sale, disposition or acquisition of a digital asset,” according to 26 CFR § 1.1001-7 of the U.S. Treasury Regulations. These transaction costs include things like fees for depositing or withdrawing on an exchange, maker/taker fees for completing a purchase or sale, and network fees (aka gas fees) on a blockchain.

5 fee scenarios and how to report them

Crypto traders pay digital asset transaction costs on many different platforms with a variety of tokens, but the IRS and Department of the Treasury formally recognize five types of transaction fees that affect cost basis.

Fees when using crypto for purchases

Whenever you use crypto to buy goods and services, the IRS considers it a disposal and you need to calculate any capital gain or loss realized. If you pay a fee to complete the transaction, the fee reduces your amount realized on the crypto you disposed of. Use the fair market value (FMV) in USD of the goods or services you receive, reduced by the fee, to calculate your gain or loss.

Suppose you bought 0.5 Ethereum (ETH) for $1,000 last year. You used that 0.5 ETH, now worth $1,250, to pay for a new computer worth $1,250, with a $10 fee to process the transaction. The computer’s FMV is $1,250, but the $10 fee reduces your amount realized to $1,240. After subtracting your $1,000 cost basis, your taxable gain is $240.

Key note: When you use crypto to make a purchase, transaction fees can reduce the amount realized on the crypto you disposed of, which may reduce your taxable gain.

Digital asset transaction costs paid in cash

If you swap between two digital assets on centralized exchanges (CEXs), you may have to pay a processing fee in fiat currency. But even if you reinvest your crypto into another digital asset, the exchange is a taxable disposition and any capital gains are taxable. Use the cost basis of the cryptocurrency you’re selling and the FMV of the crypto you receive to calculate your capital gain. The cash fee reduces your amount realized on the crypto you disposed of.

Let’s say you bought 0.05 Bitcoin (BTC) for $3,000. You then decide to trade your 0.05 Bitcoin for 40 Solana (SOL) when Bitcoin’s price rises to $80,000 per coin and the 40 SOL you receive is worth $4,000. The $10 fee reduces the amount realized from the SOL received to $3,990, and your taxable gain is $990 after subtracting your $3,000 cost basis.

Key note: Fees paid in USD for a crypto sale or swap can reduce your amount realized, which may lower your taxable gain.

Transaction costs paid with other digital assets

In some circumstances, crypto traders swap between two digital assets but use a different token to pay their fees. On some CEXs, it’s possible to use the platform’s proprietary cryptocurrency, like Binance’s BNB, to pay fees. However, this scenario is much more common on decentralized apps (dApps), where users swap between two digital assets and pay transaction fees in the blockchain’s native token.

When you pay a transaction fee with a third digital asset, you need to calculate the gain or loss on the fee asset separately from the asset you’re trading. The fee asset is disposed of to pay for transaction services, and its cost basis is included in the calculation. None of the transaction cost is added to the basis of the crypto you receive.

Let’s say you keep your crypto on Binance, where you hold 0.1 BTC with a cost basis of $3,000 and 0.01 BNB with a cost basis of $5. You decide to trade your 0.1 BTC for ETH and use the 0.01 BNB to cover the transaction fee. At the time of the sale, the ETH you receive is worth $4,000, and 0.01 BNB is worth $10.

The amount realized from the BTC-to-ETH swap is calculated by taking the FMV of the ETH received, increased by the amount realized from the BNB fee, and decreased by the value of the transaction fee. With these numbers, the amount realized is $4,000 ($4,000 ETH received + $10 BNB fee disposition - $10 transaction fee). The cost basis is $3,005 ($3,000 BTC basis + $5 BNB basis). In total, your taxable gain is $995.

Key note: Paying for a crypto transaction with a third coin means you need to account for the fee asset’s basis and fair market value, which can increase or decrease your total taxable gain.

Withholding the transferred digital asset

When a crypto exchange withholds the coin you’re trading to pay the fee, the withheld crypto is still part of the disposition. The amount realized includes the value of the crypto you receive plus the value of the transaction services received, reduced by the transaction fee. In practice, those service and fee amounts offset each other, so the taxable gain is based on the value you actually receive after the withholding.

Say you’re planning to trade your 0.1 Bitcoin (with a cost basis of $10,000) for the stablecoin USD Coin (USDC) when Bitcoin is trading for $110,000 per coin. At that price, the 0.1 BTC is worth $11,000, and the USDC received would have the same $11,000 FMV before accounting for the withheld transaction fee.

Suppose, in this case, the exchange withholds 0.0001 BTC as a transaction fee (or $11). Only 0.0999 BTC is actually swapped into USDC, so you receive USDC with a $10,989 FMV. The withheld BTC is included in the disposition, but the $11 service value and $11 transaction fee offset each other. Your taxable gain is $989 ($10,989 amount realized minus the $10,000 cost basis).

Key note: When an exchange withholds the asset you’re disposing of to cover a transaction fee, the withheld asset is still part of the disposition. Because the service value and transaction fee offset, gain or loss is based on the value of the crypto you actually receive.

Withholding the acquired digital asset

The final fee scenario applies when the exchange withholds part of the crypto you receive to pay the transaction fee. The fee reduces the amount realized on the original swap, and the withheld acquired asset does not create a separate gain or loss when its amount realized and basis are equal.

Suppose you have 0.001 BTC with a cost basis of $100. You decide to sell it for 0.04 ETH when one ETH is trading for $5,000, so the ETH received has a $200 FMV. In this transfer, the exchange withholds 0.0005 ETH (or $2.50) for a transaction fee, so you receive 0.0395 ETH. The amount realized on the BTC disposition is $197.50 ($200 ETH value minus the $2.50 fee), which means your taxable gain is $97.50 ($197.50 minus the $100 cost basis). Because the full 0.04 ETH acquired has a $200 basis in this example, the withheld 0.0005 ETH takes a proportionate $2.50 basis. The withheld 0.0005 ETH therefore has $2.50 of amount realized and $2.50 of basis, so it creates $0 gain or loss.

Key note: Withholding fees from a cryptocurrency you’re acquiring reduces the amount realized on the original transaction, while the withheld acquired asset creates $0 gain or loss since its amount realized and basis are equal.

What fees apply when purchasing crypto?

Fees don’t just change your taxes at the time of a sale or swap. If you pay transaction fees when you purchase a cryptocurrency, you can use this amount to increase your cost basis, which reduces any potential taxable gain in the future.

Let’s say you buy 0.05 Bitcoin for $4,500 and pay a $10 processing fee. In this case, the cost basis with transaction fees rises to $4,510 to reflect the true amount you spent – and lowers any future taxable gains, meaning you may pay less in taxes.

Are fees for transfers between wallets taxable?

Sending tokens between cryptocurrency exchanges and personal wallets without a sale isn’t a taxable disposal. However, if you pay the network fee in crypto, the fee asset itself is disposed of to obtain the transfer service. That means you calculate gain or loss on the crypto used to pay the fee.

For instance, if you transfer 1 BTC from an exchange to a cold storage wallet and pay the Bitcoin network a fee of 0.001 BTC, you calculate the fair market value of that 0.001 BTC and compare it with the cost basis allocated to the fee asset. If the BTC at the time of transfer was $100,000 and the cost basis for Bitcoin was $10,000, then the gain from the 0.001 BTC would be $90:

• Amount realized: $100,000 x 0.001 = $100
• Cost basis: $10,000 x 0.001 = $10
• Taxable gain: $100 - $10 = $90

To figure out the new cost basis of your 0.999 BTC, take the original cost basis of $10,000 for Bitcoin, subtract the $10 fee, and add the amount realized from the transaction fee:

$10,000 - $10 + $100 = $10,090

Reporting crypto transaction fees

Crypto transaction fees can affect reporting in different ways depending on which asset is used to pay the fee. If the fee is paid with the same asset involved in the underlying transaction, the fee can be combined with that transaction. If the fee is paid with a different digital asset, the fee asset may need to be reported separately because using it to pay the fee is its own disposal.

Form 1099-DA reporting follows a similar split. Brokers may combine fees paid with the same asset in some cases, while fees paid with a different digital asset are reported separately. Even when a broker sends a Form 1099-DA, you still need complete records to confirm how fees affect amount realized, basis, and gain or loss.

Ensure full tax compliance with CoinTracker

Accounting for crypto transaction fees takes extra time, but it’s important to avoid accidentally misrepresenting your data to the IRS. Even though CEXs send IRS Form 1099-DAs with transaction details, these forms cover only some qualifying transactions. 1099-DA forms also won’t give a full picture of how transaction fees fit into the picture and whether they can be added to the cost basis or subtracted from the final sale. With CoinTracker, you can automatically track your transaction costs and trading volume across CEXs and decentralized finance (DeFi) to import into documents like IRS Form 8949 and Schedule D.

Worried about reporting your crypto taxes? CoinTracker makes it simple. Join over three million users who trust us for hassle-free tax reporting. Start for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.