Exchange Fees and Your Taxes

How exchange fees impact tax liability

Tax liability refers to the amount of money which you owe to your local, state, and federal governments. Many cryptocurrency holders who managed to make great investing decisions will find that, with the skyrocketing of their crypto profits, comes the skyrocketing of their crypto taxes. We’ve already covered that in this article, but what does this have to do with exchange fees?



Well, we have discovered that exchange fees can actually be tax deductible. This depends highly on how you position yourself as a crypto investor, but the opportunity is there. With a smart use of exchange fee deductibles, an investor can lower their crypto tax liability to organizations like the IRS.

Crypto exchange fee deductibles aren’t the only way to go about cutting down on crypto taxes. In fact, your unique position could lead to you finding many, many more ways to minimize your tax liability. With Yoke Tax, you can set up a free one hour consultation with a tax professional. He or she will have a  minimum of twenty years of experience, and work with you to maximize the amount of your hard-earned money you keep away from the government.

Tax deductible exchange fees

The IRS is capable of recognizing exchange fees as an expense for a business. This means that, if your business transacts in cryptocurrency regularly and uses an exchange like Gemini to do so, then every fee you pay can be logged as a business expense.

But what about individuals? After all, exchange fees cannot be treated as an itemized deduction for regular taxpayers. In fact, for a lot of taxpayers, the exchange fees which they pay don’t amount to a large enough sum to compete with the $12,000 standard deduction.

In the case of individual taxpayers, we use a different method: we look at cost basis.

What is cost basis?

Cost basis is the original value of an asset which has been adjusted for stock splits, dividends, and return of capital distributions. In other words, it’s the amount which you spent to purchase your cryptocurrency to begin with.

This is important because the cost basis can be deducted from the fair market value of your crypto, and this will impact the amount of capital gains tax which you pay. Fair market value is determined by the price of the crypto asset at the time that you sell, trade, or otherwise lose authority over it. Thus, we create a new formula:

Fair Market Value - Cost Basis = Capital Gain/Loss

To provide a simple example:

Sarah buys a $100 cryptocurrency. She holds onto it for five months until she realizes that the crypto is rapidly increasing in value. She decides to sell it once the value of that crypto hits $170.

In this situation, we see that the fair market value is $170, while Sarah’s cost basis is $100. Thus, Sarah experiences a profit of $70, which is subject to capital gains tax.

Mixing exchange fees with cost basis

Now that you understand the foundation of this tax strategy, it’s very easy to realize how exchange fees can be used to manipulate the cost basis for your benefit.

When you calculate your cost basis, simply include the exchange fee in the cost! This will decrease the amount of capital gains tax which you pay the IRS.

Cost Basis = Cost + Exchange Fee

Exchange fee amounts can vary from exchange to exchange, but let’s try to apply the logic which we used in the previous example with Sarah to illustrate the usefulness of this concept.

Assuming a 0.50% exchange fee (Coinbase’s flat fee), Sarah’s $100 investment would increase to $150. That would be her adjusted cost basis. Once this is subtracted from the $170 fair market value when she sells in five months, Sarah’s true profit would be identified at $20. That’s $50 less that the IRS can charge capital gains on her for!

What does this look like on a higher scale?

Oftentimes, Yoke Tax clients are not simply holding on to a single cryptocurrency. Usually, there are a handful of them, good and bad investments. Some of these coins and tokens have been held onto for a long time, and some of which are new editions to the investor’s crypto portfolio. Depending on the unique situation of the client, the amount of capital gains or capital losses will vary.

As an example for a higher-scale implementation of the exchange fee cost basis strategy, we’ll use Alex:

Alex is a new investor and has $15,000 worth of crypto in his portfolio. He bought five coins for $3,000 each. He did this all on Coinbase, which has a flat 0.50% exchange fee. This fee is applied to each coin separately.

Now, we quickly see how Alex’s $15,000 cost is increased by the five instances of exchange fees, which totals to $7,500. This means that Alex’s cost basis is actually $22,500.

Now, let’s say the fair market value of Alex’s portfolio increases to $18,000, and he’s had enough of crypto. He just can’t take the headache! He sells everything.

$18,000 - $22,500 = -4,500. A capital loss!

The silver lining

…Which isn’t as bad as it seems. Alex did make a $3,000 profit trading crypto, but the exchange fees inflated the cost of his investment, and thus led to a capital loss. This actually comes with a wide range of benefits. Now, Alex can take that capital loss and offset it against assets of his which are actually doing really well, such as his real estate. This lowers his overall tax liability in the long run, even if he spent a lot on exchange fees.

This is why it’s so important, amongst other things, to connect with a trained tax professional. They will walk you through all the little details which you need to consider before filing your taxes. The goal here is to maximize the amount of crypto profits which you keep in your hands, while minimizing the amount that the federal government and your local state governments take from you.

Set up a free one hour consultation as soon as you can.