Accounting for crypto transaction fees

Paying fees can be extremely detrimental to your portfolio, particularly when gas fees are high during periods of congestion on the Ethereum blockchain. Many solutions have tried to fix this problem, such as the Lightning Network on Bitcoin, layer 2’s on Ethereum such as Polygon, or layer 1’s with much lower fees like Solana. Despite these options, cryptocurrency investors cannot escape fees, whether in decentralized finance (DeFi) or centralized exchanges. 

While you should always consider fees and try to minimize your transaction costs as much as possible, there is a silver lining when it comes to filing your taxes - many of these fees can be deducted from your gains, providing a potential tax benefit.

The recent United States tax regulations on digital asset reporting included specific guidance on five different types of fee scenarios. In this guide, we’ll break down the scenarios presented and explain how CoinTracker handles all of these situations. This ensures you can deduct every last satoshi possible.

What are crypto transaction costs?

Whenever you buy, sell, or transfer crypto, you’re likely paying transaction fees. The 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.” These are the fees that you incur to complete a transaction, such as deposit and withdrawal fees, trading fees and network fees (like Ethereum gas fees). The Internal Revenue Service (IRS) classifies these fees as "digital asset transaction costs," and they play a key role in your tax calculations.

Transaction costs matter because they directly affect your taxable gains. Properly accounting for these costs can reduce your taxable gains, lower your tax bill, and ensure compliance with IRS regulations. 

For example, if you sell $1,000 worth of Bitcoin (BTC) but pay $25 in transaction costs to complete the sale, your proceeds are $975, not $1,000. Without tracking these costs, you’d be overpaying taxes on income you didn’t actually receive.

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Fee scenarios and how to report

Crypto fees come in many different forms depending on the exchange, whether it is a centralized exchange (CEX) or a decentralized exchange (DEX), and the type of transaction being executed. 

For fees on DEXs, other dApps or blockchain transfers, transaction costs vary significantly depending on the blockchain and network congestion.

The crypto broker regulations break out transaction costs into five different types:

1. Exchange of digital assets for services

This refers to scenarios when you use crypto to pay for goods and services, and you pay a fee, whether in cryptocurrency or cash.

Example 1A: You transfer 1 BTC for services (or goods) worth $100,000 and pay $5,000 in cash fees to complete the transaction.

Sent

• 1 BTC
  • Fair Market Value (FMV): $100,000 per BTC
  • Cost Basis: $10,000 total
• $5,000 cash fee

Received

• Services (or goods)
  • FMV: $100,000

The $5,000 fee is applied to your disposition of 1 BTC. 

Amount realized: $100,000 - $5,000 = $95,000

Cost basis: $10,000

Taxable gain: $95,000 - $10,000 = $85,000

Example 1B: If the fee is paid with crypto, you would need to consider the gross proceeds and cost basis from the crypto itself. Suppose you use 1 BTC to pay for services (or goods) worth $100,000 and pay a .05 BTC transaction fee.

Sent

• 1 BTC
  • FMV: $100,000 per BTC
  • Cost Basis: $10,000 total
• .05 BTC fee
  • Cost Basis: $500 total

Received

• Services (or goods)
  • FMV: $100,000

Your amount realized would be increased by the amount realized from the BTC fee and decreased by the value of the transaction fee. The cost basis of the fee asset is also included in the calculation.

Amount realized: $100,000 + $5,000 - $5,000 = $100,000

Cost basis: $10,000 + 500 = $10,500

Taxable gain: $100,000 - $10,500 = $89,500

2. Digital asset transaction costs paid in cash in an exchange for digital assets

This scenario occurs when you exchange one cryptocurrency for another and pay transaction fees in cash. This is very common in the crypto space. 

Example 2: You exchange .6 BTC for 20 ETH and pay $1,000 fee in cash to the exchange.

Sent

• .6 BTC
  • FMV: $100,000 per BTC ($60,000 total)
  • Cost Basis: $6,000 total
• $1,000 cash fee

Received

• 20 ETH
  • FMV: $3,000 per ETH ($60,000 total)

The transaction fee would get allocated to the amount realized.

Amount realized: $60,000 - $1,000 = $59,000

Cost basis: $6,000

Taxable gain: $59,000 - $6,000 = $53,000

3. Digital asset transaction costs paid with other digital assets

This scenario refers to when you exchange one cryptocurrency for another, and you pay the fees with a third cryptocurrency. This is often seen in certain CEXs, such as Binance, where fees are often paid using BNB. This also happens in just about every swap through a DEX or other dApps, when swapping two assets requires fees to be paid in the native currency of the blockchain.

Example 3: You exchange .6 BTC for 20 ETH, but this time you pay the fees using 2 BNB. 

Sent

• .6 BTC
  • FMV: $100,000 per BTC ($60,000 total)
  • Cost Basis: $6,000 total
• 2 BNB fee
  • FMV: $500 per BNB ($1,000 total)
  • Cost Basis: $300 per BNB ($600 total)

Received

• 20 ETH
  • FMV: $3,000 per ETH ($60,000 total)

The amount realized from the transaction is calculated by taking the FMV of the 20 ETH received, increased by the amount realized from the BNB fee, and decreased by the value of the transaction fee. The cost basis is calculated by taking your total cost basis from both, the BTC exchanged and the BNB fee.

Amount realized: $60,000 + $1,000 - $1,000 = $60,000

Cost basis: $6,000 + 600 = $6,600

Taxable gain: $60,000 - $6,600 = $53,400

4. Digital asset transaction costs withheld from the transferred digital assets in an exchange of digital assets

This fourth scenario applies when you trade one cryptocurrency for another, and the fees are paid from the cryptocurrency that you trade. This would apply when trading crypto on certain CEXs, or if you trade the native currency of the DEX.

Example 4: You exchange .6 BTC for 20 ETH and the exchange charges a fee of.01 BTC by withholding. 

Sent

• .6 BTC
  • FMV: $100,000 per BTC ($60,000 total)
  • Cost Basis: $6,000 total
• .01 BTC fee
  • FMV: $1,000 total
  • Cost Basis: $100 total

Received

• 20 ETH
  • FMV: $3,000 per ETH ($60,000 total)

This scenario is almost identical to the previous one. Because you are paying the fee with crypto, you have to include the fee amount in the proceeds as part of the amount realized. However, you can also reduce the proceeds by the same amount due to the transaction costs. In addition, you need to consider the cost basis of the crypto used to pay the fee.

Amount realized: $60,000 + $1,000 - $1,000 = $60,000

Cost basis: $6,000 + $100 = $6,100

Taxable gain: $60,000 - $6,100 = $53,900

5. Digital asset transaction fees withheld from the acquired digital assets in an exchange of digital assets

The last scenario is for instances when you trade one cryptocurrency for another, and the fees are withheld from the crypto that you receive. Depending on the situation, some CEXs may use this approach

 Example 5: You exchange .6 BTC for 20 ETH and the fees will be paid using .2 ETH, meaning you will actually receive 19.8 ETH. 

Sent

• .6 BTC
  • FMV: $100,000 per BTC ($60,000 total)
  • Cost Basis: $6,000 total

Received

• 19.8 ETH (20 ETH - fee)
  • FMV: $3,000 per ETH ($59,400 total)
• 0.2 ETH
  • FMV: $600 total

The amount realized is based on the FMV of the 19.8 ETH received, while your cost basis is the cost basis of the BTC exchanged.

Amount realized: $59,400

Cost basis: $6,000

Taxable gain: $59,400 - $6,000 = $53,400

We must also separately compute the gain or loss on the .2 ETH used as the transaction fee. The amount realized and the cost basis are both based on the value of the fee.

Amount realized: $600

Cost basis: $600

Taxable gain: $600 - $600 = $0

Fees when purchasing crypto

What about fees when you buy crypto with fiat and pay a fee?

Example 6: You buy 1 BTC for $100,000 and the exchange charges you $1,000 USD. 

Sent

• $100,000 
• $1,000 fee

Received

• 1 BTC
  • FMV: $100,000 per BTC

As this is not a taxable transaction, there is no amount realized or gain or loss calculation. You do, however, need to account for the cost basis in the acquired crypto, which is equivalent to the amount paid, including transaction costs.

Cost basis: $100,000 + $1,000 = $101,000

Once you sell or trade this BTC, the cost basis would be considered in factoring your taxable gain or loss.

Transfers

One of the most common scenarios in which fees are paid is when you transfer crypto between wallets or exchanges. More often than not, a transaction fee in the native currency of the blockchain used will be paid on the transfer.

Example 7: You transfer 1 BTC from an exchange to your hardware wallet. In completing the transfer, the BTC network charges you a .001 fee. 

Sent from exchange

• 1 BTC (including the .001 BTC fee)
  • FMV $100,000 per BTC
  • Cost basis: $10,000 total

Received in your wallet

• .999 BTC

While transferring crypto is not a taxable disposal, the disposal of the fee asset is. Gain or loss is calculated based on the FMV of the fee at the time of the transaction. The amount realized is the value of the fee at that moment because, even though it is paid to a third party, you are effectively using the asset to obtain a service—enabling the transfer. As a result, the transaction is treated as a taxable sale rather than a deductible expense. Therefore, the calculation below applies only to the disposal of 0.001 BTC.

Amount realized: $100,000 x .001 = $100

Cost basis: $10,000 x .001 = $10

Taxable gain: $100 - $10 = $90

In addition, your cost basis for your .999 BTC is now your original cost basis reduced by the amount used for the fee, increased by the amount realized from the fee.

Original cost basis of 1 BTC: $10,000

Cost basis used for the fee: $10

Amount realized from fee: $100

New cost basis of .999 BTC: $10,000 - $10 + $100 = $10,090

Reporting 

Currently, CoinTracker reports all crypto transaction fees by adjusting the amount realized and cost basis according to IRS guidelines. Fees paid in the same asset as the underlying transaction are combined into a single transaction, while fees paid in a different asset are reported separately.

When 1099-DA reporting begins for tax year 2025, the same approach will apply. Brokers may combine reporting for fees paid with the same asset, but fees paid with a different digital asset will be listed as separate transactions. CoinTracker’s reporting is already aligned with this methodology, ensuring a smooth transition to 1099-DA reporting.

Full compliance with CoinTracker

With so many ways to handle fees, tracking everything can be overwhelming, especially if you trade across various exchanges. But don’t worry, CoinTracker covers all of these scenarios exactly as described above.

All you have to do is link your exchange accounts and wallets and let CoinTracker do the rest. This way, you can sleep peacefully, knowing that you will get all the tax benefits you are entitled to for every transaction.

Get started with a free account today for a stress-free tax season.

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