Understanding Ethereum network fees for tax purposes

Question

My question is in relation to UK tax as explained in this document, however it should be applicable to other jurisdictions as well.

Ethereum is a platform for decentralised finance. Unlike Bitcoin, developers can build complex applications on top of the base layer, such as:

1. USD Coin, an ERC20 representation of the US dollar created by Coinbase and Circle
2. Uniswap, an automated token exchange where you can buy and sell Ether (the native token of the Ethereum blockchain) for other ERC20-tokens

Imagine that I bought 1.01 Ether on Coinbase last year, withdrew it to my Ethereum wallet (such as MetaMask) and sold 1 Ether on Uniswap in exchange for 100 USDC.

Here's the catch. For my transaction to be included in the blockchain, I had to pay a network fee in the form of gas, which is denominated in Ether. Although the costs was much less, suppose that I paid 0.01 Ether for my Uniswap trade.

So I got approximately $100 worth of value in exchange for 1 Ether, but I also paid approximately $1 (the 0.01 Ether) for my transaction to be processed by the blockchain.

Now, the following statements are simultaneously true:

1. I'm allowed to deduct any transaction fees from my proceeds
2. Making a payment with Ether tokens is considered a disposal of Ether tokens

Therefore, the network fee CANNOT be deducted from my proceeds, because it's offset by a disposal of Ether of the same amount, which happened at the exact same time.

The rationale would've been the same if I bought 1 Ether with 100 USDC and paid 0.01 Ether for the network fee, with the only change being that the fee couldn't have been added to the cost basis.

I think this is a bit like buying or selling gold to a broker and paying the brokerage fees directly in gold.

Is my rationale correct?

Answer 1

Assuming you're trying to work out CGT, I don't see how your two statements cause you a problem.

As you say, making a payment with Ether tokens is considered a disposal. Make up some value for the payment you made, i.e. the transaction fee. Call it x.

Now, you must have paid a certain amount for your 1.01 Ether. Let's say $80 to keep things fairly simple.

You've made $100 for selling 1.00 Ether, plus x for disposing of 0.01 Ether, and you can deduct x from the $100. Your cost basis was $80 so your gain is $20, no matter what x is.

A simpler way of thinking about is just that you bought 1.01 Ether, and sold 1.01 Ether for $100, the transaction happening to include a payment fee built in to it.