Discover the hidden costs of crypto trading and actionable strategies you can use to avoid any surprises.
Most stock and crypto investors are familiar with commissions, but these aren’t the only expenses eating away at your profits. From the subtle impact of bid-ask spreads to the sudden spike in gas fees during network congestion, lesser-known expenses can mean the difference between a profitable strategy and a losing one.
In this comprehensive guide, we’ll pull back the curtain on the true cost of crypto trading and show you actionable strategies to avoid costly mistakes.
Spreads & Slippage
The bid-ask spread—or the difference between the highest buy order and the lowest sell order in an order book—can become an enormous hidden cost. While this spread may seem minimal when looking at major cryptocurrencies like Bitcoin or Ethereum, it can become substantial when trading altcoins or when volatile market conditions exist.
Order books have a limited area where buyers and sellers agree and more depth when prices are higher or lower. Source: CoinLobster
The image above shows an example of the ETH/USD order book. The trough in the middle represents the current market price, where a small number of buyers and sellers are agreeing to trade at a specific price. On the left are buyers willing to purchase at lower prices, and on the right are sellers willing to sell at higher prices.
Less popular altcoins have a steep trough where there’s less agreement on price. If you place a market order—saying you’re willing to purchase at any cost—you might pay more than you expect because there may not be enough sellers at the current price.
Consider this real-world scenario: You want to purchase $50,000 of an altcoin. The current price shows $1.00, but here’s how your order might fill:
First $10,000 at $1.00 (10,000 tokens)
Next $15,000 at $1.02 (14,705 tokens)
Next $15,000 at $1.05 (14,285 tokens)
Final $10,000 at $1.08 (9,259 tokens)
Your actual average price becomes $1.037, meaning you paid an extra $1,850 (3.7%) due to slippage—far more than the exchange’s advertised trading fee!
Avoiding Spreads & Slippage
You can avoid spreads and slippage by using “limit” orders rather than “market” orders. Rather than agreeing to buy at any price, limit orders involve setting the price you’re willing to pay. But, while this avoids any price surprises, you risk missing out on the order being filled if the ask price doesn’t reach your limit order price.
Limit orders can also lower the fees you pay to exchanges. Maker fees (limit orders) are often lower than taker fees (market orders) because exchanges want to maintain a deeper order book, making it a win-win for traders.
Gas Fees & Network Congestion
Gas fees represent the computational cost of processing transactions on blockchain networks like Ethereum. These fees operate on a dynamic pricing model that fluctuates based on network demand, much like surge pricing in ride-sharing services. And like a ride back from the airport, these fees can catch you by surprise!
Under the hood, gas fees consist of a base fee set by an algorithm and a priority fee to encourage validators to complete a transaction quickly. Network congestion plays a crucial role in gas price swings, and the priority fee can grow exponentially when many people want something at once.
For example, in mid-2020, Uniswap suddenly announced that any wallet that had used their platform before September 1, 2020, could claim 400 UNI tokens. Within hours, tens of thousands of users rushed to claim their tokens, and Ethereum gas fees rose from $2 to $3 to between $50 and $100, with staking costs reaching upwards of $200 per transaction.
Avoiding High Gas Fees
The best way to avoid paying unexpectedly high gas fees is to avoid trading during peak hours and instead focus on weekends or late night/early morning UTC time. Enabling gas limits in your wallet or exchange is also a good idea. If you’re not in a hurry to buy or sell, you can set lower limits to minimize the impact of these fees.
Level 2 blockchains are also solving these problems. Networks like Polygon and Optimism offer much lower fees by handling transactions off the main chain. However, you should remember to factor in bridge fees when moving crypto between networks.
Unexpected Tax Expenses
The U.S. crypto tax landscape can catch even serious traders off-guard. While getting wrapped up in the thrill of trading is easy, failing to prepare for tax obligations can lead to severe financial stress and potential legal complications. Understanding and preparing for taxes is just as crucial as mastering trading strategies.
Most crypto traders and investors know their annual filing requirements—but that’s not the only tax obligation. The IRS requires quarterly estimated payments when you expect to owe $1,000 (or more) in taxes from trading activities. Missing these can result in fines and penalties, even if you eventually pay the full amount by the tax deadline.
For instance, suppose you make $25,000 trading crypto in 2023 but didn’t set aside any money. In April 2024, you realize you must make a $7,500 payment. At best, you might need to sell some 2024 positions unexpectedly to pay the taxes. At worst, you might have lost the $25,000 in 2024 and not have the $7,500 to pay taxes!
You might also be surprised to learn what a taxable event is in crypto. In addition to profits on trades, the IRS considers mining, staking, and even earnings on play-to-earn games as taxable income. Moreover, if you buy and sell crypto within one year, you will owe higher taxes on short-term capital gains, which can be twice as high as long-term capital gains.
Staying on Top of Taxes
The easiest way to stay on top of tax obligations is using a crypto tax platform like ZenLedger. These platforms automatically aggregate your transactions across wallets and exchanges and compute your capital gains and losses in real-time. You can also determine your quarterly payments to avoid incurring any costly penalties.
ZenLedger makes it easy to import transactions from any wallet or exchange and create a unified accounting report. Source: ZenLedger
In addition to these capabilities, ZenLedger automatically analyzes your crypto holdings to identify opportunities to harvest tax losses. These efforts can help you lock in losses, offset other capital gains, and up to $3,000 in ordinary income each year.
The Bottom Line
Crypto trading involves more than just buying and selling digital assets for a set commission fee. As we’ve explored, a complex web of spreads, slippage, gas fees, and tax obligations can significantly impact your trading profitability. And understanding and preparing for these costs isn’t just good practice—it’s essential for success.
You can keep more of your trading profits by staying mindful of these hidden costs and implementing the strategies we’ve discussed. After all, in the world of trading, it’s not just about how much you make—it’s about how much you keep!
If you trade crypto assets, ZenLedger can help you stay on top of your taxes.
Spreads, Slippage & Other Hidden Trading Costs
Most stock and crypto investors are familiar with commissions, but these aren’t the only expenses eating away at your profits. From the subtle impact of bid-ask spreads to the sudden spike in gas fees during network congestion, lesser-known expenses can mean the difference between a profitable strategy and a losing one.
In this comprehensive guide, we’ll pull back the curtain on the true cost of crypto trading and show you actionable strategies to avoid costly mistakes.
Spreads & Slippage
The bid-ask spread—or the difference between the highest buy order and the lowest sell order in an order book—can become an enormous hidden cost. While this spread may seem minimal when looking at major cryptocurrencies like Bitcoin or Ethereum, it can become substantial when trading altcoins or when volatile market conditions exist.
Order books have a limited area where buyers and sellers agree and more depth when prices are higher or lower. Source: CoinLobster
The image above shows an example of the ETH/USD order book. The trough in the middle represents the current market price, where a small number of buyers and sellers are agreeing to trade at a specific price. On the left are buyers willing to purchase at lower prices, and on the right are sellers willing to sell at higher prices.
Less popular altcoins have a steep trough where there’s less agreement on price. If you place a market order—saying you’re willing to purchase at any cost—you might pay more than you expect because there may not be enough sellers at the current price.
Consider this real-world scenario: You want to purchase $50,000 of an altcoin. The current price shows $1.00, but here’s how your order might fill:
Your actual average price becomes $1.037, meaning you paid an extra $1,850 (3.7%) due to slippage—far more than the exchange’s advertised trading fee!
Avoiding Spreads & Slippage
You can avoid spreads and slippage by using “limit” orders rather than “market” orders. Rather than agreeing to buy at any price, limit orders involve setting the price you’re willing to pay. But, while this avoids any price surprises, you risk missing out on the order being filled if the ask price doesn’t reach your limit order price.
Limit orders can also lower the fees you pay to exchanges. Maker fees (limit orders) are often lower than taker fees (market orders) because exchanges want to maintain a deeper order book, making it a win-win for traders.
Gas Fees & Network Congestion
Gas fees represent the computational cost of processing transactions on blockchain networks like Ethereum. These fees operate on a dynamic pricing model that fluctuates based on network demand, much like surge pricing in ride-sharing services. And like a ride back from the airport, these fees can catch you by surprise!
Under the hood, gas fees consist of a base fee set by an algorithm and a priority fee to encourage validators to complete a transaction quickly. Network congestion plays a crucial role in gas price swings, and the priority fee can grow exponentially when many people want something at once.
For example, in mid-2020, Uniswap suddenly announced that any wallet that had used their platform before September 1, 2020, could claim 400 UNI tokens. Within hours, tens of thousands of users rushed to claim their tokens, and Ethereum gas fees rose from $2 to $3 to between $50 and $100, with staking costs reaching upwards of $200 per transaction.
Avoiding High Gas Fees
The best way to avoid paying unexpectedly high gas fees is to avoid trading during peak hours and instead focus on weekends or late night/early morning UTC time. Enabling gas limits in your wallet or exchange is also a good idea. If you’re not in a hurry to buy or sell, you can set lower limits to minimize the impact of these fees.
Level 2 blockchains are also solving these problems. Networks like Polygon and Optimism offer much lower fees by handling transactions off the main chain. However, you should remember to factor in bridge fees when moving crypto between networks.
Unexpected Tax Expenses
The U.S. crypto tax landscape can catch even serious traders off-guard. While getting wrapped up in the thrill of trading is easy, failing to prepare for tax obligations can lead to severe financial stress and potential legal complications. Understanding and preparing for taxes is just as crucial as mastering trading strategies.
Most crypto traders and investors know their annual filing requirements—but that’s not the only tax obligation. The IRS requires quarterly estimated payments when you expect to owe $1,000 (or more) in taxes from trading activities. Missing these can result in fines and penalties, even if you eventually pay the full amount by the tax deadline.
For instance, suppose you make $25,000 trading crypto in 2023 but didn’t set aside any money. In April 2024, you realize you must make a $7,500 payment. At best, you might need to sell some 2024 positions unexpectedly to pay the taxes. At worst, you might have lost the $25,000 in 2024 and not have the $7,500 to pay taxes!
You might also be surprised to learn what a taxable event is in crypto. In addition to profits on trades, the IRS considers mining, staking, and even earnings on play-to-earn games as taxable income. Moreover, if you buy and sell crypto within one year, you will owe higher taxes on short-term capital gains, which can be twice as high as long-term capital gains.
Staying on Top of Taxes
The easiest way to stay on top of tax obligations is using a crypto tax platform like ZenLedger. These platforms automatically aggregate your transactions across wallets and exchanges and compute your capital gains and losses in real-time. You can also determine your quarterly payments to avoid incurring any costly penalties.
ZenLedger makes it easy to import transactions from any wallet or exchange and create a unified accounting report. Source: ZenLedger
In addition to these capabilities, ZenLedger automatically analyzes your crypto holdings to identify opportunities to harvest tax losses. These efforts can help you lock in losses, offset other capital gains, and up to $3,000 in ordinary income each year.
The Bottom Line
Crypto trading involves more than just buying and selling digital assets for a set commission fee. As we’ve explored, a complex web of spreads, slippage, gas fees, and tax obligations can significantly impact your trading profitability. And understanding and preparing for these costs isn’t just good practice—it’s essential for success.
You can keep more of your trading profits by staying mindful of these hidden costs and implementing the strategies we’ve discussed. After all, in the world of trading, it’s not just about how much you make—it’s about how much you keep!
If you trade crypto assets, ZenLedger can help you stay on top of your taxes.
Get started today for free!
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