CryptoTaxCalculator has a separate category for "approvals," fees paid for approving a token in preparation for selling it. Do these reduce capital gains or increase capital losses? Are they accounted for otherwise in taxes?
Justin from Summ here (formerly Crypto Tax Calculator).
Approvals are simply just a disposal from a tax POV. They trigger a taxable gain or loss. Whether it’s a loss or a gain is completely dependent on the cost basis on the asset.
Just like gas fees, the IRS taxes these as the fair value at the time you sent it out minus the cost basis on the amount with the difference being your gain or loss.
I appreciate your time but I am a bit confused. So, let's say I buy XYZ for $5 and then I go to sell it and pay $1 in ETH for approval and then sell it for $9. What is my taxable income? (I realize you have to pay capital gains on the $1 in ETH if the ETH paid was in profit but please ignore that. How does the approval fee of $1 reduce taxable income?
A while ago, you buy .0001 ETH for $0.25. This is your cost basis on that ETH. You use that .0001 ETH to pay the approval fee when it’s worth $1.
That approval fee disposal results in a $0.75 gain.
It has no impact on the XYZ transaction.
If you want it to be treated like a transaction fee (where the fair value of the fee reduces your gain), then you’d need to merge it with the sale of XYZ transaction to include it. To do this you’d need to edit the transaction details and attempt to group them. Currently working on making this process (merging transactions in general) easier
Well it’s an issue of substance. A transaction fee directly attached to a transaction is deductible. Gas fees, however, aren’t (unless you want a risky position). Approvals sit somewhere in the middle in terms of whether they are clearly deductible or not.
As a software, it’s defaulting to conservative treatment is standard. If you want to go with a less conservative approach, you’d need to edit the transaction to group it with the XYZ token sale.
"digital asset transaction costs may include transaction and “gas” fees, transfer taxes, and commissions." May include gas fees. Does this change your opinion?
Keep reading. It goes on to say gas fees paid office a transfer of assets is not included. Full FAQ:
“The term "digital asset transaction costs” means the amount paid by you in cash or property (including digital assets) for services provided by another to effect the purchase, sale, or disposition of a digital asset. For example, digital asset transaction costs may include transaction and “gas” fees, transfer taxes, and commissions. If you pay costs to effect a transfer of digital assets, rather than a purchase, sale, or disposition, those costs are not treated as digital asset transaction costs. For example, amounts paid by you for transaction services to effect a transfer of your digital assets between your own wallets or accounts are not treated as digital asset transaction costs.”
Thanks for your time. Yes I am aware that transfer costs do not count as transaction costs. But there are still gas fees that do. Bridge fees? Failed transaction fees that could be grouped with the successful transaction? Approval fees?
XYZ transaction = the token you’re actually selling.
ETH transaction = the ETH you spend to pay fees (gas, approvals, etc.).
These are two different taxable events in the eyes of the IRS.
Now the answer 👇
An approval fee never reduces your gain on the XYZ sale by default.
Why? Because the approval is just you spending ETH, not you selling XYZ.
So the IRS treats it as:
You disposed of a tiny amount of ETH → small gain/loss
It has no automatic impact on the profit from selling XYZ
The only time an approval can reduce your capital gain is if you manually attach it to the XYZ sale — which is a grey-area approach, not the standard one.
So in simple terms:
Approval = taxable event for the ETH you spent.
Sale = taxable event for the XYZ you sold.
They don’t offset each other unless you merge them on purpose.
Justin from Summ here (formerly Crypto Tax Calculator).
Approvals are simply just a disposal from a tax POV. They trigger a taxable gain or loss. Whether it’s a loss or a gain is completely dependent on the cost basis on the asset.
Just like gas fees, the IRS taxes these as the fair value at the time you sent it out minus the cost basis on the amount with the difference being your gain or loss.
I appreciate your time but I am a bit confused. So, let's say I buy XYZ for $5 and then I go to sell it and pay $1 in ETH for approval and then sell it for $9. What is my taxable income? (I realize you have to pay capital gains on the $1 in ETH if the ETH paid was in profit but please ignore that. How does the approval fee of $1 reduce taxable income?
Take XYZ out of the equation.
A while ago, you buy .0001 ETH for $0.25. This is your cost basis on that ETH. You use that .0001 ETH to pay the approval fee when it’s worth $1.
That approval fee disposal results in a $0.75 gain.
It has no impact on the XYZ transaction.
If you want it to be treated like a transaction fee (where the fair value of the fee reduces your gain), then you’d need to merge it with the sale of XYZ transaction to include it. To do this you’d need to edit the transaction details and attempt to group them. Currently working on making this process (merging transactions in general) easier
So the fee is $1 and you're saying you dont deduct that $1 from capital gains or add to capital losses?
What about the separate ctc category (under net expenses) of "fees"? What goes into them and are they deductible from taxable income?
Well it’s an issue of substance. A transaction fee directly attached to a transaction is deductible. Gas fees, however, aren’t (unless you want a risky position). Approvals sit somewhere in the middle in terms of whether they are clearly deductible or not.
As a software, it’s defaulting to conservative treatment is standard. If you want to go with a less conservative approach, you’d need to edit the transaction to group it with the XYZ token sale.
"Gas fees, however, aren’t (unless you want a risky position)." What's included in gas fees?
Take a look at the IRS' question to item 53 here. "https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-digital-asset-transactions"
"digital asset transaction costs may include transaction and “gas” fees, transfer taxes, and commissions." May include gas fees. Does this change your opinion?
Keep reading. It goes on to say gas fees paid office a transfer of assets is not included. Full FAQ:
“The term "digital asset transaction costs” means the amount paid by you in cash or property (including digital assets) for services provided by another to effect the purchase, sale, or disposition of a digital asset. For example, digital asset transaction costs may include transaction and “gas” fees, transfer taxes, and commissions. If you pay costs to effect a transfer of digital assets, rather than a purchase, sale, or disposition, those costs are not treated as digital asset transaction costs. For example, amounts paid by you for transaction services to effect a transfer of your digital assets between your own wallets or accounts are not treated as digital asset transaction costs.”
Thanks for your time. Yes I am aware that transfer costs do not count as transaction costs. But there are still gas fees that do. Bridge fees? Failed transaction fees that could be grouped with the successful transaction? Approval fees?
That would be helpful. Do you know when that might be available?
XYZ transaction = the token you’re actually selling. ETH transaction = the ETH you spend to pay fees (gas, approvals, etc.).
These are two different taxable events in the eyes of the IRS.
Now the answer 👇
An approval fee never reduces your gain on the XYZ sale by default. Why? Because the approval is just you spending ETH, not you selling XYZ. So the IRS treats it as:
You disposed of a tiny amount of ETH → small gain/loss
It has no automatic impact on the profit from selling XYZ
The only time an approval can reduce your capital gain is if you manually attach it to the XYZ sale — which is a grey-area approach, not the standard one.
So in simple terms: Approval = taxable event for the ETH you spent. Sale = taxable event for the XYZ you sold. They don’t offset each other unless you merge them on purpose.