Are crypto trading fees tax deductible? What you need to know

The world of digital assets is filled with exchanges, wallets, and blockchain assets – each often charging fees. To minimize these costs and maximize gains, it helps to know if and when crypto trading fees are tax deductible.

In this guide, we'll explain how to claim trading fees on your taxes, optimize your long-term crypto tax strategy, and report deductions to ensure compliance.

How are cryptocurrency trading fees taxed?

Tax implications for crypto traders and investors are complex, and as digital assets become more integrated into traditional financial services, the rules continue to evolve. However, in the United States, cryptocurrency transactions must be reported to the Internal Revenue Service each tax year.

The deductibility of crypto trading fees depends on how the taxpayer’s activities are classified. For casual investors or hobbyists, cryptocurrency is generally treated as a capital asset, with gains or losses from sales subject to capital gains tax. In these cases, trading fees are incorporated into the asset's cost basis but aren’t directly deductible.

For those conducting crypto activities as a trade or business, there are more opportunities to deduct ordinary and necessary expenses, including exchange fees, transaction costs, and other business-related expenses.

What crypto fees can be deducted from taxes?

In general, fees related to acquiring, disposing of, or exchanging cryptocurrency are tax deductible. However, it’s important to consult a tax professional or use crypto tax software to ensure compliance with tax regulations.

Below are some of the most common fees traders can typically write off when reporting to the IRS:

Exchange fees

Exchanges charge fees for buying, selling, and transferring crypto. While sending crypto to a custodial wallet on an exchange is often free, transferring it to an external wallet or another platform usually incurs a charge. Maker and taker fees are also common, with maker fees applying to those who add liquidity to the market and taker fees to those who remove it. These fees are typically tax deductible as part of your cost basis or trading expenses.

Network fees (gas fees)

Blockchain networks charge gas fees to compensate validators and miners for processing transactions. These fees fluctuate based on network congestion and transaction complexity. Gas fees during taxable events, such as buying or selling crypto, are generally added to the asset’s cost basis or reduce the sales proceeds. For non-taxable events, like transferring between personal wallets, while there is no explicit guidance, it is reasonable to include them as part of the cost basis of the asset, as they directly relate to the acquisition or transfer of the asset.

Wallet fees

Some wallets allow users to buy or swap crypto within the app, often charging fees for these services. These fees vary by wallet provider and cryptocurrency. Wallet fees for purchasing or trading crypto can be added to the cost basis and deducted when calculating capital gains or losses.

Conversion fees

Exchanging cryptocurrency for fiat or another crypto typically incurs a conversion fee. While stablecoin conversions may sometimes be free, such as from USD Coin (USDC) to fiat, most conversions involve service fees, which are tax deductible if they relate to a taxable event.

How to report crypto trading taxes: 5 steps 

When reporting crypto taxes, organization and accuracy are vital to ensuring compliance with IRS regulations. Properly managing your records and understanding the tax implications of your trades can significantly reduce stress and potential tax liabilities. Here are five essential steps to help simplify the process:

1. Keep detailed records 

It's important to maintain detailed records of each transaction made throughout the year. This includes the cost of all fees charged and the value of crypto at the time of purchase and transfer. These records help traders calculate capital gains and are essential if the IRS audits a trader’s tax report.

2. Calculate an accurate cost basis

The cost basis is the original value paid for a cryptocurrency, including any fees to acquire the asset. Proceeds refer to the amount you receive when you sell the asset. For example, if a trader sells 1 ETH for $4,000 and the cost basis is $3,500, they would subtract the cost basis from the proceeds to calculate the gain:

$4,000 - $3,500 = $500 

3. Report trading fees

If a trader incurs fees when selling an asset, they can subtract them from the proceeds to reduce their capital gains. Continuing with the example above, if the exchange charges a $50 fee, the trader’s gain would be reduced to $450:

($4,000 - $50) - $3,500 = $450 

4. Consult a tax professional

Detailing every trade and calculating tax deductions can take time, and unexpected capital gains taxes can cause unnecessary stress. Many traders benefit from consulting a tax professional who understands the nuances of crypto trading and can offer guidance on keeping accurate crypto tax records.

5. Use crypto tax software

Managing taxes for multiple cryptocurrencies can be challenging, but the right crypto tax software streamlines the process. Solutions like CoinTracker integrate seamlessly with digital wallets and exchanges, automatically tracking transactions, calculating deductions, and preparing IRS-compliant forms. CoinTracker also takes care of tracking trading fees and ensuring they're reported accurately, saving you from the hassle of manual calculations. For many traders, the cost of a subscription is well worth the time and effort saved compared to handling tax reporting manually.

Optimize your tax strategy with CoinTracker

Implementing a successful tax strategy is essential for maximizing deductions. With features like automated DeFi detection and robust security, CoinTracker accurately tracks every crypto trade, helping you optimize your tax return and simplifying the filing process. CoinTracker’s powerful integrations link seamlessly to all your exchanges and wallets, ensuring instant and comprehensive accounting.

Get started for free and discover why millions of traders trust CoinTracker to handle their crypto tax needs.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.