What are some hidden costs of investing in crypto? 1. Slippage and Spread: The price difference between the expected price of a trade and the executed price. Exchanges and decentralized finance (DeFi) platforms often include a hidden markup within the spread. 2. Network / Gas Fees: Variable fees paid to blockchain miners or validators to process transactions. These fluctuate drastically based on network congestion. 3. Exchange & Cash-Out Fees: Maker/taker commissions, flat deposit/withdrawal fees, and fiat-offramping charges levied by centralized platforms. 4. Wrap, Bridge, and Protocol Fees: Costs associated with converting tokens across different standard formats (e.g., wrapping ETH to WETH) or bridging assets across different blockchain networks. The IRS treats cryptocurrency as property. How a fee is handled on your tax return depends on the nature of the transaction. Fees paid when purchasing digital assets (such as transaction fees or exchange commissions) are added to the asset's cost basis. It is an increase to the starting cost basis, which lowers your taxable gain when you eventually sell or dispose of the asset. Fees incurred when selling crypto or swapping one token for another are subtracted from your gross proceeds. Fees reduce total proceeds, directly shrinking your realized capital gain (or increasing your realized loss). When you pay a network gas fee using cryptocurrency (e.g., spending ETH to execute a transaction), the IRS views the payment of that fee as a taxable disposition of the crypto spent. You must calculate a capital gain or loss on the exact amount of crypto consumed to pay the gas fee, based on the difference between its fair market value at the time of the transaction and its original cost basis. If a smart contract or blockchain interaction fails, the network still consumes the gas fee. For individual retail investors, gas fees spent on failed transactions are generally classified as non-deductible personal expenses under current tax law. Let's walk through an example. You purchase 1 BTC for $60,000 and pay a $100 trading fee. Your starting cost basis is $60,100. Later, you sell that 1 BTC for $70,000 and pay a $100 exit fee. Your net proceeds are $69,900. Your taxable capital gain is calculated as $69,900 - $60,100 = $9,800 (saving you tax on $200 worth of fees).