Last Updated: November 07, 2020
Rising gas prices on the Ethereum network have significantly cut into users’ profits. Luckily, if reported correctly, you can use these burdensome gas fees to reduce your crypto tax bill.
What is Gas On Ethereum Network?
Gas is a unit of measure for the amount of computational effort that it will take to execute certain operations on the Ethereum network. Every transaction on Ethereum requires a certain amount of computation effort, measured in gas. The transaction fee you have to pay to the Ethereum network to execute a transaction is based on the amount of gas required, and paid in ether — the cryptocurrency that runs on the Ethereum network. The common unit used for these transaction fees is called a “gwei” or one nano ether (0.000000001 ether).
As the number of transactions increase on the Ethereum network, gas prices go up. This is due to supply and demand: there are a limited number of slots for transactions to go into each block on the Ethereum network, but more demand to get into each slot.
As you can see in the chart below, over the past few months, average gas fees steadily rose while spiking on multiple occasions due to the congestion caused by increasing DeFi activity. As a result, each time users move their coins in the Ethereum network, there is a hefty transaction fee that has to be paid to miners, thereby reducing profits.
Although it’s not explicitly mentioned in the tax code, gas fees paid on transactions can be used to reduce your tax bill when properly tracked and reported.
Gas Fees On Selling Crypto
Gas fees on sales and dispositions are deducted from proceeds. For example, if Anne sells 1 ether (ETH) for $100 and spends $5 for gas, her total proceeds on the transaction would be $95 ($100 – $5).
Gas Fees On Transferring Crypto
Gas fees on transfers can be added back to the basis of the token. Suppose Anne purchases 1 ETH at $10 on Coinbase. In order to transfer this token to Metamask, she has to incur a $2 gas fee. Once the transfer is complete, the cost basis of her 1 ETH on Metamask will be $12 ($10 + $2). When you up the cost basis with the gas fees incurred, the eventual capital gain resulting from selling that coin will decrease.
Failed Gas Fees
Losing ether to failed transactions is a somewhat common occurrence in the Ethereum blockchain. For example, transactions can fail if users don’t include sufficient gas to pay the transaction fee for a transaction they are trying to initiate. Even though the transaction fails to confirm, the ether paid to attempt the confirmation is not refunded.
If you lose ether in a failed transaction, that could result in a capital loss which you could use to offset capital gains. Suppose you spent 1 ETH in gas fees and the transaction failed. You purchased this ETH for $100. At the time you spent it on gas, it was worth $80. Here, you have a disposition event and a capital loss of $20 ($100 – $80). Note that if the price of ETH has gone up in value, you could also have a capital gain.
In order to get these tax benefits, you should keep detailed records of your ether transactions, cost basis of ether you hold and the market value of ether at the time you spent on gas. However, It's extremely hard to do this by hand or even on a spreadsheet. A tool like CoinTracker can come in really handy when it comes to tracking your gas fees and calculating your annual crypto tax.
If you have any questions or comments about crypto taxes let us know on Twitter @CoinTracker.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.