Ethereum Gas Fees Tax: Complete Guide 2023 | CoinLedger (2024)

Wondering whether gas fees for Ethereum and other blockchains 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 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 gas fees taxable?

Before we get into the tax benefits of gas fees, we need to clarify that spending cryptocurrency as gas fees is considered a disposal of a capital asset - which requires reporting capital gain or loss from the disposal.

Disposals of digital assets include selling for fiat like USD, exchanging for another digital asset, or in making a purchase of goods or services. In the case of Ethereum gas fees, a disposal of your ETH occurs when you spend ETH on gas in order to use the Ethereum blockchain — which could be considered a kind of service.

Are Ethereum gas fees tax deductible?

While gas fees are considered a taxable disposal, they can also be used to reduce your capital gains when buying/selling cryptocurrency.

Buying assets

Any purchase costs for your digital assets, such as gas fees, can be added to the cost basis. This reduces your capital gain when you eventually dispose of the asset.

Selling assets

Any selling costs, such as gas or exchange fees, can reduce your proceeds upon a disposal of a digital asset. This, in turn, reduces your capital gain.

How do I report gas fees on my tax return?

Because gas fees are considered both a taxable disposal of cryptocurrency and an added cost of buying/selling cryptocurrency, investors are often confused about how to report them on their tax returns.

To better understand how to report gas fees, let’s take a look at an example.

In this case, Rob has two taxable disposals of cryptocurrency. The first takes place when he disposes of ETH to buy his NFT. The second takes place when he disposes of ETH to pay his gas fees.

Let’s take a closer look at the tax implications of these transactions.

Rob should report both of these disposals on Form 8949, along with his cost basis, his gross proceeds, and the date he received and disposed of his cryptocurrency.

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, or on other transactions that require gas but aren’t directly related to an acquisition or disposal. There are different approaches available to taxpayers depending on their risk-appetite.

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.
   

With an aggressive approach, any gas fees spent related to managing your investments would increase the basis of the same cryptocurrency assets that were used for gas. This may apply to situations such as spending gas fees to move your coins around in order to have access to different crypto assets or DeFi protocols.

For example, in this aggressive approach, if ETH is spent in gas to execute a wallet-to-wallet transfer that allows your access to different crypto assets, you can increase the basis of your ETH by whatever the proceeds were of the ETH used for gas fees.

A more conservative approach would be to consider any gas fees not directly related to an acquisition or disposal as nondeductible.

Can Ethereum gas fees be used to offset business income?

A business can deduct any expenses related to operating their business. If the nature of your business involves transactions on the Ethereum blockchain, you will be able to deduct gas fees on your business tax return.

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.
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How to report taxes on your Ethereum transactions

Reporting Ethereum transactions on your tax return can get complicated quickly. Many investors have dozens, hundreds, or even thousands of transactions with DeFi protocols, decentralized applications, and NFT marketplaces.

Luckily, crypto tax software like CoinLedger can help.

CoinLedger can help you report taxes on your Ethereum transactions in minutes. Simply type in your Ethereum wallet address and our platform will take care of the rest.

Looking for an easy way to manage your crypto taxes?

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

CoinLedger 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.

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