Are Ethereum (ETH) Gas Fees Tax Deductible?

Zac McClureUpdated at: Aug 14th, 2021

Photo by Martin Adams

"Gas" is the fee required for making a transaction on the Ethereum blockchain. The amount of the fee depends on the supply and demand from the network's miners. If the available computational power does not meet the demand of users, miners can command a higher fee for processing the transaction.

With gas prices spiking due to increased interest in cryptocurrency, some may be wondering if gas fees can be deducted from taxes. Read on to learn more.

Ethereum (ETH) gas fees may be tax deductible.

Because the IRS has not issued specific guidance on many aspects of the DeFi ecosystem—including gas fees—we recommend taking a conservative approach to your treatment of gas fees. However, based on existing gains for capital gains tax, it is probable that the type of transaction determines whether or not gas fees can be deducted or used to offset gains.

Trades and swaps

Gas fees can be added to the cost basis of an asset, which later reduces capital gains or increases capital losses on that asset when it is sold or otherwise disposed of. This determination is based in the IRS’s guidance in Publication 551, which states that financial assets can have their cost basis increased by costs associated with the purchase.

For example:

  • You exchange 1000 USDC ($1000) 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. 

Then…

  • 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.

Claiming 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), you pay a gas fee. The crypto received is taxed as income. 

When crypto is received as income, your cost basis is the market value. Fees can be used to increase this cost basis so that you have lower capital gains or higher capital losses when you sell these assets.

Transfers and other miscellaneous transactions

Transfers and other miscellaneous blockchain fees are treated differently because they aren’t associated with an acquisition of crypto, so it’s not a straightforward situation of adding the fee to the cost basis. 

There’s multiple ways to approach tax treatment of these fees, ranging from conservative to aggressive. Please note that we recommend the conservative approach, as aggressive approaches may not stand up to later IRS scrutiny:

  • 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 ETH 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 employed or within a business entity like an 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 their mining income with electric and equipment fees. 

Related Content

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Learn how to save money on your crypto taxes

We’ll send you tips that smart investors use when filing their taxes

Calculate your crypto taxes now

TokenTax does the hard work so you don’t have to.