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Crypto Taxes
Crypto Taxes

How to Report Ethereum Gas Fees on Your Tax Return

Wondering whether Ethereum gas fees are tax-deductible? 

If you used the Ethereum network to make transactions in the past year, you may have paid hundreds or even thousands of dollars in gas fees. While dealing with these fees may have felt frustrating at the time, there may be a silver lining: potential tax savings.  

In this article, we’ll discuss how reporting Ethereum gas fees can reduce your tax liability for the year. 

What are Ethereum gas fees? 

Ethereum allows developers all across the world to build decentralized applications on its network. Today, the Ethereum network enables cryptocurrency enthusiasts the ability to mint NFTs, trade on decentralized exchanges like Uniswap, and even play blockchain-based games like Axie Infinity

Ethereum miners across the world provide computing power for the Ethereum ecosystem. This helps validate transactions and maintain the security of the blockchain. 

In return for utilizing this computing power, Ethereum users must pay a ‘gas fee’ for individual transactions. These fees rise and fall based on how much demand there is for the network at any given time. 

Are Ethereum gas fees tax deductible? 

Let’s go through some common scenarios where Ethereum gas fees may apply to your transactions. 

Buying assets

It’s reasonable to assume that the cost of buying an asset can be added to the cost basis for buying the asset. This can reduce your capital gains when you dispose of the asset. 

Ethereum gas fee taxes

Selling assets 

Gas fees for selling assets are treated slightly differently. In this case, it’s likely that gas fees can be deducted from the proceeds of your sale. 

Ethereum gas fee deduction

Gas fees on wallet-to-wallet transfers, deposits, and failed transactions

The IRS has not provided clear guidance on how to treat transfers from one wallet to another. While some taxpayers opt for more aggressive approaches, we recommend not applying gas fees from these types of transactions to your cost basis. 

Typically, the IRS allows expenses to be applied to the cost basis of property if the transaction meets one of the following two conditions: 

  1. It is a necessary part of buying or selling the property. 
  2. It increases the underlying value of the property. 

Since the IRS has labeled cryptocurrency as a type of property, it’s reasonable to assume that these same rules apply to crypto transactions. 

In this case, wallet-to-wallet transfers, deposits, and failed transactions do not increase the underlying value of the tokens you hold, so it’s likely that fees from these transactions cannot be applied to your cost basis. 

Can Ethereum gas fees be used to offset income? 

Individuals cannot use gas fees to offset personal income. However, businesses can deduct any expenses related to operating their business. If the nature of your business involves transactions on the Ethereum blockchain, you will most likely be able to deduct gas fees on your business tax return. 

Looking for an easy way to manage your crypto taxes? 

Dealing with the complexities of crypto taxes can feel stressful. CryptoTrader.Tax can help simplify the process. 

CryptoTrader.Tax can connect with your exchanges and wallets in minutes. Don’t worry about forgetting to report one of your transactions — simply connect your trading history through an API integration or a manual upload.  

Don’t wait until the tax deadline to get started — create a free account today. 

Recently updated on
October 11, 2021
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