Are Ethereum Gas Fees Tax Deductible?
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Ethereum gas fees for a transaction can likely be added to an asset's cost basis if the transaction is a trade, swap, or income from yield farming, staking, or airdrops.
It is less clear whether transfers and other miscellaneous fees are eligible for this treatment.
"Gas" is the name for transaction fees on the Ethereum blockchain. The fee's size depends on the supply and demand from the Ethereum network miners. If the available computational power does not meet the demand of users, miners can ask a higher fee for processing the transaction.
With increased interest in crypto driving gas fees up, you may be wondering if they can be used to offset your earnings or income. Read on to learn more.
Are gas fees tax deductible?
Because the IRS has not issued specific guidance on gas fees, we recommend treating them conservatively. However, based on existing guidance, it is likely that gas fees' tax treatment depends on the type of crypto transaction they were related to.
Fees for trades and swaps
When a transaction is a trade or swap, gas fees can be added to an asset's cost basis. According to IRS Publication 551, financial assets can have their cost basis increased by costs associated with their purchase, reducing their reportable profits when eventually sold. An Ethereum gas fee calculator like TokenTax can help you apply gas fees to your crypto's cost basis.
Trade gas fee example
You exchange 1,000 USDC ($1,000) for 1 ETH on Uniswap.
You pay 0.01 ETH in gas fees, which is equivalent to $10.
Your cost basis for the 1 ETH would be $1,010.
You sell the 1 ETH for $1,020 USD (assuming no fee on the sale, for simplicity).
If the gas fee paid on acquisition was ignored, you would have a $20 capital gain.
With this gas fee accounted for, you have only a $10 capital gain.
Fees for claiming rewards and airdrops
When crypto is received as income, your cost basis is the market value. However, you can add gas fees to this cost basis so that you have lower capital gains or higher capital losses when you sell these assets.
Fees for transfers and other miscellaneous transactions
Transfers and other miscellaneous blockchain fees are treated differently than the previous two examples because they don't involve the acquisition of an asset. Thus, it’s not a straightforward situation of adding the fee to the cost basis.
There are multiple ways to approach tax treatment of these fees, ranging from conservative to aggressive. Please note that we recommend the conservative approach.
Conservative: Treat ETH fees spent in this instance as taxable sales, as if you had spent ETH on a good or service.
Medium: Claim the Ethereum spent on fees as removed from your holdings, but don’t recognize a capital gain or loss.
Aggressive: Claim ETH as a sale for 0 USD, claiming a capital loss on ETH spent.
You could also potentially add ETH transfer fees to your cost basis. However, the IRS could argue that these transfers were not necessary for the subsequent ETH sale to take place, thus this is a more contentious tax standpoint.
Using ETH gas fees to offset income
As an individual, you cannot directly offset income with expenses. However, if you yield farm as a business, either as self employment or within a business entity like a crypto LLC or corporation, you could deduct gas fees for yield farming as business expenses.
These businesses expenses would offset your income from yield farming, much like a bitcoin miner would offset mining income with electric and equipment fees.
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