How do trading fees affect my taxes?
Divly ensures that trading fees are included in your capital gains tax calculations. Accounting for trading fees help reduce the taxes you pay. This is one of the benefits of automating your crypto taxes.
Handling trading fees can be tedious and time consuming. However, Divly automates the complexity assuming the fees are included in the transaction data. Divly handles fees differently when the fee is in a Fiat currency (USD, EUR, SEK etc) versus a cryptocurrency (BTC, ETH, ADA etc). We will explain the methodologies and differences below.
Purchase Crypto with Fiat
Assume you purchased 1 Bitcoin for $1000 with a trading fee of $20. In this case Divly would add the trading fee to the purchase price of the Bitcoin. Effectively you will have purchased 1 Bitcoin for $1020 (cost basis). If you sell 1 Bitcoin for $1100, you will have made $80 profit ($1100 - $1020) assuming no trading fee when selling.
Sell Crypto to Fiat
Assume from the previous example that you sold 1 Bitcoin for $2000, however now you paid a trading fee of $30 to sell it. In this case Divly will subtract the trading fee from the sale price so it equals $1970 ($2000 - $30). Your total profit will be $950 ($1970 - $1020). By accounting for both of the fees you have decreased your taxable profit by a total of $50.
Trade Crypto for Crypto
Assume instead that you sold 1 Bitcoin for 10 Ether with a trading fee of $30. In this case we would have to avoid double counting the fee and need to choose whether the fee should reduce the sale price of the Bitcoin, or increase the purchase price of the Ether. Currently Divly will do the former and decrease the sale price of the Bitcoin. Assuming 10 Ether is equal to $2000 on the time of the trade, the following will happen:
1 Bitcoin will incur a profit of (($2000 - $30) - $1020) = $1970 - $1020 = $950
10 Ether will have a cost basis of $2000. The fee is not added to the cost basis since it is already utilized to lower the sale price for Bitcoin.
What if the trading fee is in Crypto?
In many scenarios, a trading fee may be denominated in a cryptocurrency such as BTC, USDT, or ETH. This adds some extra complexity to the equation as using crypto to pay for an exchange service is in many countries seen as a taxable event.
In this case Divly will first calculate the capital gains on the crypto associated with the fee. Divly will then apply the same value in local currency to the fee calculations explained above.
Let's take a look at the previous example but assume the fee was paid with 0.1 LTC worth $30 on the date of the trade. We will assume that you previously purchased the 0.1 LTC for $15.
1 Bitcoin will incur a profit of $950 = (($2000 - $30) - $1020).
10 Ether will have a cost basis of $2000.
0.1 LTC will have a profit of $15 ($30 - $15).