Rising gas prices on the Ethereum network have significantly cut into users’ profits. Fortunately, you can use these burdensome gas fee to reduce your crypto tax bill.
High Ethereum transaction fees pushing investors to alternatives
New and old cryptocurrency investors and traders are seeking Ethereum alternatives to avoid the extremely high Ethereum transaction fees. The main reason for using Defi and cryptocurrency is to achieve independence from the finance firms and centralized banks.
However, it looks like this purpose is being defeated due to the high fees associated with Ethereum transactions. Thus, making decentralized finance (Defi) untradeable for the average user. Hence, it is no surprise that investors are flocking to Binance and other centralized platforms.
Ethereum 2.0 is not a solution for high gas fees
DeFi analysts and computer scientists share their ideas on the high gas fee potential solutions. Although they have various opinions on solutions, they all concluded that Ethereum 2.0 is not the solution for high transaction costs.
Despite promises, Ethereum’s Berlin fork has not decreased high gas fee
The Ethereum network launched the Berlin fork a few days ago with promises that it would improve the scalability problems and the high gas fee, but this has not been the case as Ethereum’s gas fee is still extremely high. The demand for digital assets has caused many activities on the blockchain, making it busier than ever with numerous transactions.
Almost two months after, Ethereum hits another high average of $24 per transaction, making the space spend higher to settle their transactions, and the Berlin upgrade fork is yet to deliver on promises. The transactions have gone as high as $39 on an average in February, but then things have cooled down, following new solutions yet making big changes.
People in the digital asset space know that the high transaction fee prices mean that the blockchain is busier than ever with lots of NFTs and DeFi projects, which have caused the network to settle transactions at a slower rate.
Asides from that, average traders, have to spend more money for activities on the blockchain, even those with the lowest priorities. According to its creators, this new rise could have been triggered by the new Ethereum upgrade called the Berlin fork, which would improve things on the ETH network.
Even after the launch, the Berlin fork has not made the promised improvements including high gas fee. This has caused some confusion in the digital asset sphere as traders await a suitable solution that would end the network’s high fees.
It is important to note that the Ethereum network is currently undergoing lots of changes, particularly due to the space’s demand for NFTs, which usually stayed below the interest list. Many new trends have pushed enthusiasts into getting interested in the NFT sector, and the tiny fraction continues to grow impressively. Ethereum is one of the industry’s best performers as it continues to go sky high after bypassing the $2,000 resistance level.
What is gas on Ethereum network?
Gas refers to a unit of measure for the amount of computational effort that it takes to execute operations on the Ethereum network. Every transaction on Ethereum needs a certain amount of computation effort, which is measured in gas. The transaction fee you need to pay to the Ethereum network to execute a specific 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 high. This is due to supply and demand: because 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.
Over the past few months, average gas fees steadily increased while spiking on multiple occasions due to the congestion caused by increasing DeFi activity and NFT craze. 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 everything is properly tracked and reported.
Gas fees on selling crypto
Gas fees on sales and dispositions are deducted from proceeds. For instance, if someone 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 someone buys 1 ETH at $10 on Coinbase. In order to transfer this token to Metamask, he needs to incur a $2 gas fee. Once the transfer is complete, the cost basis of his 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 fee and tax
Losing ether to failed transactions is a somewhat common event in the Ethereum blockchain. For instance, transactions can fail if users don’t include sufficient gas to pay the transaction fee for a transaction they are trying to execute. 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 bought 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 increased in value, you could also have a capital gain.
In order to get these tax benefits, you should keep all detailed records of your transactions, cost basis of ether you hold and the market value of ether at the time you spent on gas fee. However, it’s extremely difficult to do this by hand or even on a spreadsheet. Some tools like CoinTracker can come in really handy when it comes to tracking your gas fee and calculating your annual crypto tax.