Ethereum (ETH) gas fees may be tax deductible, depending on circumstance
Payment of Ethereum gas fees are required for a variety of actions on the Ethereum blockchain, including (but not limited to) trading, yield farming, transfers, approvals, and claiming airdrops or staking rewards. How these fees are incorporated into your tax bill likely depends on the kind of transaction.
As with many aspects of taxation within the Ethereum and Decentralized Finance (DeFi) ecosystem, there have not been specific IRS guidelines as to how to treat gas fees. The below explanations take into account existing guidance for capital gains tax, but as there is no clear relevant guidance, we recommend a conservative approach in assessing on how fees could be treated.
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 you sell it. This stems from the IRS’s guidance via Publication 551 that states that financial assets can have their cost basis increased by costs associated with the purchase.
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.
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 are paying a gas fee for this transaction. 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 conserative to aggressive. Please note that we recommend the conservative approach, as aggressive approaches risk additional tax assessed, with penalties and interest, by the IRS down the line
Conservative: recognize ETH fees spent in this instance as taxable sales, like if you were to have 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 questionable tax standpoint.
How you can use ETH gas fees to offset income
As an individual, you cannot directly offset income with expenses. However, if you are yield farming 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.
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