How to Report Ethereum Gas Fees on Your Tax Return

"Gas" is the name for transaction fees on Ethereum and other networks. Different networks use different types of cryptocurrency for gas. These include:

• Ethereum: ETH

• Arbitrum: ETH

• Optimism: ETH

• Avalanche: AVAX

• Binance Smart Chain: BNB

The crypto gas fee size for a given transaction or operation depends on supply and demand on a network. This means the busier a given network is at a given time, the higher the corresponding gas fees. 

After Ethereum launched its proof of stake algorithm in September of 2022 (switching from proof of work), gas fees on the network became the reward for users who stake ETH and participate in validation. The more ETH someone stakes, the more they can earn from gas fees.

Because the IRS has not issued specific guidance on crypto gas fees, we recommend treating them conservatively. However, based on existing guidance it is likely the tax treatment of gas fees depends on the type of crypto transaction they were related to - namely, personal or professional.

There is a great deal of nuance to the question “are gas fees tax deductible," and tax laws regarding cryptocurrency are evolving. We strongly recommend speaking with a qualified crypto tax accountant, who can provide guidance based on your circumstances.

Taxpayers outside the US should look to our helpful country guides for further guidance in their region.

Are Ethereum gas fees tax deductible? 

If you use crypto such as Ethereum for personal investments, it’s unlikely your corresponding crypto gas fees would be considered tax-deductible expenses. However, the fees can be used to adjust your cost basis, which we cover further in this article.

If you use crypto for business activities or trade professionally, you may be able to deduct crypto gas fees as a business expense. This might apply if you actively mine, trade, or conduct other business with cryptocurrency or accept crypto as a form of payment.

How to handle crypto gas fees for trade transactions

When you use Ethereum or other cryptocurrency for gas fees, this may trigger a taxable event, typically in the event of a sale. The IRS may treat this use of crypto for gas as if you sold a capital asset. This means you may need to report capital gains or losses resulting from the trades you execute.

In other words, if the cryptocurrency you use to execute a trade has appreciated in value since you acquired it, you must report that disposal and corresponding capital gains to the IRS using  Form 8949, along with your gross proceeds, cost basis, and the date you received and disposed of your cryptocurrency. 

When selling, crypto gas fees can also be used to reduce your proceeds, in turn reducing capital gains. In the case of purchases, the gas fees can be added to the cost basis of the purchase.

How to handle crypto gas fees for transactions that aren’t trades

The IRS has not provided guidelines as per the treatment of transfers between wallets and transactions involving gas fees that are not linked to acquiring or disposing of assets.  Typically, the IRS permits expenses to be applied to the cost basis of property if the transaction satisfies either of the following: 

• It is essential in order to purchase or sell the property. 

• It enhances the property’s intrinsic value. 

With an aggressive approach, crypto gas fees expended to manage investments would augment the basis of the same crypto assets utilized for gas. This applies when you use crypto gas fees to transfer crypto between wallets to gain access to different crypto assets or DeFi protocols. With this approach, the cost basis of your ETH can be increased by the gas fees.

The conservative approach, which we recommend, is to treat crypto gas fees that are not related to asset acquisition or disposal as nondeductible.

Crypto gas fee taxes for yield farming, staking, and airdrop rewards

When you claim yield farming rewards (e.g. CRV from Curve), airdrops (e.g. UNI from Uniswap) or staking rewards (e.g. SNX and sUSD from Synthetix), the crypto received is taxed as income. 

When crypto is received as income, your cost basis is the market value. However, you can include gas fees in your cost basis calculation so that you have lower capital gains or higher capital losses when you sell these assets.

Here are instructions for taxpayers to report crypto gas fees on their tax returns. How you report will be determined by whether you use crypto personally or professionally, and your region.

1. Determine the purpose of your crypto activities: Do you use crypto for personal investment or business purposes? This will likely impact how you report the gas fees.

• Personal investment: If you use crypto for personal reasons, gas fees are not typically tax-deductible. You would report your capital gains or losses from buying, selling, or exchanging crypto (such as Ethereum) on your tax return as per your region’s regulations. 

• Business activities: If you engage in crypto-related business activities (such as mining, trading, or operating a business that accepts crypto), you may be able to deduct corresponding crypto gas fees as a business expense.

2. Record your gas fees: Maintain comprehensive records of your crypto transactions, including the gas fees paid. You can find this information on a blockchain explorer and in most cases in your crypto wallet transaction history. 

3. Report gas fees: Depending on the tax laws in your region, you may report gas fees as part of your business expenses on the appropriate tax forms. This could be Schedule C (in the United States) for self-employed taxpayers or a similar form for reporting business income and expenses.

Crypto gas fee taxes for buying crypto, selling, and trading

When you spend crypto such as Ethereum for gas fees, this may trigger a taxable event. In the case of gas for disposals of crypto assets, the IRS treats this as if you sold a capital asset (that is, the crypto used for the sale). This means you may need to report capital gains or losses resulting from certain gas fee transactions.

Gas fees in cryptocurrency transactions are not only subject to taxation but can also play a role in reducing your capital gains when buying or selling digital assets. 

• Selling or Trading Assets: When you sell, trade, or dispose of crypto, this typically triggers a taxable event. Expenses related to these transactions, such as crypto gas or exchange fees, can be deducted from the proceeds. By doing so, you are able to reduce your taxable gains and optimize your tax situation.

• Crypto gas fees for trades and swaps can be added to your cost basis: 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. 

Can you use gas fees to offset income?

Individuals typically cannot directly offset income with expenses. However, if you mine crypto, provide crypto-related services, or yield farm as a business (either self-employment or within a business entity like a crypto LLC or corporation), you may be able to deduct gas fees for yield farming as business expenses. 

• These business expenses would offset your income from yield farming, much like a Bitcoin miner would offset mining income with electric and equipment fees. 

Navigating the world of crypto taxes can be daunting. TokenTax simplifies the process and provides the support you need, however complex your crypto filing might be. Whether you're an individual investor or a business dealing with cryptocurrencies, we offer comprehensive crypto tax services and software to ensure compliance and peace of mind. 

Say goodbye to the headaches of manually tracking and calculating your crypto transactions, including Ethereum and other crypto gas fees. Our platform seamlessly integrates with popular cryptocurrency exchanges and wallets so you can effortlessly import your data and generate accurate tax reports. No more worrying about missed transactions or costly errors – we have you covered. 

TokenTax generates tax forms based on your data, including Form 8949 and Schedule D, to make the tax filing process easy. Simplify your crypto taxes today and focus on what matters most: your investments.

Here are answers to frequently asked questions about crypto gas fees, are crypto gas fees tax deductible, and what are gas fees in crypto?

Can you claim gas fees on taxes?

If you use Ethereum for personal investments, it’s unlikely your Ethereum gas fees would be considered tax-deductible expenses. However, gas fees could be added to the cost basis for your trades.

If you use Ethereum for business activities or trade professionally, you may be able to deduct gas fees as a business expense. This might apply if you actively mine, trade, or conduct other business with Ethereum or accept it as a form of payment.

Can Ethereum gas fees be used to offset business income?

Crypto gas fees could be considered a cost of doing business and you may potentially deduct them as an expense against business income. This typically depends on the nature of your business and how you use crypto. If you use crypto such as Ethereum for business (e.g. mining, trading, or providing crypto services), gas fees might be considered deductible expenses.

What is Gwei?

Gwei is a denomination used in relation to Ethereum. Gwei is an abbreviation of "gigawei," in which "giga" represents the metric prefix for one billion and “wei” is the smallest unit of Ether. Gwei measures the cost of transaction fees and the gas price to execute operations on the Ethereum network. 

Gas price, measured in Gwei, determines the amount of ETH required to execute a given transaction or operation. Ethereum miners prioritize transactions based on the gas price offered. When the network is very active, gas prices increase with demand.