During a crypto for crypto trade, sometimes people pay the transaction fee with a third cryptocurrency, such as Binance Coin (BNB) or Kucoin Shares (KCS). The question is, should such transaction fee be included in the basis or sales proceeds calculation, and if yes, how?
Here is how I see it:
Let's say you bought 1 BTC for $10,000 on Coinbase, then you transferred it to Binance for trading with XRP a month later. Let's ignore the transfer fee. When buying XRP with BTC, you paid a 0.075% trading fee in BNB, which you had a cost basis of $5. Let's say at the time of the trade, BTC was worth $12,000. Following is the calculation:
(1) Exchange between BTC and XRP
This is treated as a two-step transaction: first, a deem sale of BTC, then, a purchase of XRP with the "sales proceeds" from the deem sale of BTC.
Gross Sales proceeds from sale of BTC = $12,000
Trading fee = $12,000 x 0.075% = $9 [A]
Net Sales proceeds: = $12,000 -$9 = $11,991
Cost basis of BTC = $10,000
Gain on sale of BTC = $11,991 - $10,000 = $1,991
Cost basis in XRP = $11,991
(2) Payment of BNB as transaction fee:
Sales proceeds from deemed sale of BNB = $9 (see [A] above)
Cost basis of BNB = $5
Gain on sale of BNB = $9 - $5 = $4
As you can see, you not only need to calculate gain/loss on the exchange between BTC and XRP, technically you also need to calculate gain/loss on the use of BNB as a trading fee. Then the fee should be deducted from the sales proceeds of the coin that is being sold, i.e., BTC, not added to the cost basis of XRP. The only time a transaction fee should be added to the cost basis of a coin that is being purchased is when fiat currency is used for the purchase. For example, if you are buying BTC for $1,000 and you are being charged $30 as transaction fee, your total cost will be $1,030 (= $1,000 + $30).
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