Can I subtract transfer fees from my capital gains?

[ma11hew28]

I think I can subtract trading fees from gross proceeds when calculating net proceeds on Form 8949, but can I also subtract transfer (deposit/withdrawal) fees?

For example, let's say:

• Deposit: I send ₿1 from my hardware wallet to my account on a cryptocurrency exchange (my crypto account). As a result ₿1 is withdrawn from my hardware wallet, but since the bitcoin network charges me a transaction fee of ₿0.0005, only ₿0.9995 is deposited into my crypto account. Since the fair market value (FMV) of ₿1 at the time of the transaction is $10,000, the FMV of the bitcoin transaction fee is $5.
• Trade: Using my crypto account I sell ₿0.9995 for $9,995, but the cryptocurrency exchange charges me a trading fee of $10, leaving me with $9,985 in my crypto account.
• Withdrawal: A few days later I withdraw the $9,985 from my crypto account to my bank account, but the cryptocurrency exchange charges me a withdrawal fee of $7, depositing only $9,978 into my bank account.

What should I put on Form 8949 for the net proceeds of the sale of my ₿1?

Similarly, can I add transfer fees to the cost basis of a purchase?

[Anonymous]

the trading fees should be reflected on the 1099_b. if not since they are related to purchase and sale. they are deductible from the capital gain or add to capital loss.   fees for the deposit of cash or the withdrawal of cash from the a/c is a non-deductible personal expense. 

[GiseleD · Accepted solution]

We cannot make these exact calculations for you, but we can guide you on how to do them. 

1) You cannot deduct the fees to transfer coins on/off exchange or to/from a wallet. Those are lost to the miners because they did not occur in the cost of a sale; they are just transfer fees. 

2) However, the fee to execute the trade is deductible. Just add the trading fee to the basis of the token traded. 

For example, if you sell 1 ETH and your original cost basis (what it cost you to buy the token) was $200, then you will adjust the basis by adding the trading fee. If the trading fee was $10, then your new cost basis in the ETH you sold is $210.

Keep good records in case you are ever audited. 

[Nameless]

I'm still unsure of how to account for the transfer fees which just disappear from the bitcoin balance when it is transferred from the exchange to a wallet and back again to the exchange for sale. Using the example from the original question, above, 1 BTC was purchased for amount $A and then 0.9995 was sold for amount $B. My initial assumption was that my gain would be B-A and that's what I should report and not worry about the leaked 0.0005, but if the fees are not "deductible" (by essentially reducing the proceeds from the sale, since I would be selling fewer BTC than I bought), how and where would I account for the 0.0005 BTC? Is paying the fee considered a sale of part of my BTC to pay for something, similar to ordering a pizza? If so, is that a taxable event at the time the fee is paid?

[Irene2805]

It seems that your initial assumption, that your gain is B-A is correct.  It's that 0.005 that's puzzling.  It is either:

• still in your account; or
• sold and used by the brokerage to pay your transfer fees.

In either situation, your gain/loss is B-A.

[fanfare]

a fee is a fee, as pointed out in the earlier answer.

You can't deduct fees because the changes to Schedule A don't allow that anymore.

[Nameless]

It's essentially the latter but not directly related to the sale.

In the hypothetical example, the total 0.0005 BTC was drained from the original 1.0 BTC and paid to the exchange and/or miners at some time as a fee for the service of transferring the BTC from the exchange to a hardware wallet and, later, from the wallet back to the exchange (say 0.00025 each way).  This is not part of the  larger BTC sale except in that the BTC has to be on the exchange and not in the wallet to be sold. I wouldn't expect it to be deductible, but my question is how to account for it? 

If  0.0005 BTC were used to buy a pizza, it would be considered a sale of that much BTC and there would be a gain or loss on it at the time of the pizza order. So is this similar, in that 0.0005  BTC was used pay for  services at the time of the transfers and so would be considered a "sale" at that time?

That makes the most sense to me because all of the original 1.0 BTC would be accounted for and the larger sale would be for (1.0 - 0.0005) "shares". 

Fortunately, I don't have to worry about a real life example until next year's taxes. It will be interesting to see how CoinTracker handles it.

Thanks for the reply!

[DianeW777]

Do not reduce the proceeds by these fees and do not add them to your cost basis. It seems you are asking if the transfer agent charges fees to move your Bitcoin in and out of the agent portal they are not part of the sales expense but rather a fee for the convenience of using the agent.  Since these are not commissions on the actual trades, then as stated earlier these are fees related to the use of the account and not for sales of the actual trades themselves.

If this is the case, then these fees are interesting, but are not relevant to the capital gain or loss.  If you think of having a fee just to have a debit card associated with your account, this is not a fee that can be deducted any place.  After 2017, fees of this sort are no longer an itemized deduction and for this reason they are not used.

[AndrewW2]

I think your concern is what "happens" to the transfer fees from an accounting perspective.  I think the answer is CoinTracker will assume you are still holding those coins.  This isn't a problem because in CoinTracker there will never be a realized gain/loss on those coins...it will basically think you hold them forever.  Although, this could possibly become an issue if we ever have to pay taxes on unrealized gains. 

For now the only issue I see is differentiating short and long term gains.  Suppose in a few years you buy 1 BTC and sell 1 BTC within a month of each other for a gain.  Since the 0.0005 transfer fee was "held" for a few years, CoinTracker will treat this sale as 0.0005 long term gains and 0.9995 of short term gains (if using FIFO).

[RBS-Maine]

Actually you are partially correct, but the coins are not still in any account and there is a proper way to treat it.

If the fee were paid in USD then there would be no further treatment needed, it is a broker/exchange/transfer fee and no longer deducitible, but the fee is paid in cryptocurrency.

This is no different than buying a pizza or coffee with cryptocurrency.

Fee of .05 with a 20 dollar cost. at time of paying the fee the FMV of the fee is let's say 25 dollars. So you paid a capital gain on the fee of 5 dollars.

Remember any time you use crypto to buy anything the IRS looks at is as if you sold that crypto to make the payment.

So he sold .05 of the crypto for 25 dollars which cost him 20 originally, that is a 5 dollar capital gain, then he spent that 25 dollars on the fee which is not deductible.