What is meant by transaction costs?

Transaction costs refer to the expenses that arise in addition to the purchase or sale of goods or the use of services. These costs are not limited to financial outlays but also include time-related costs. For example, transaction costs begin with the time and effort required to gather information. Furthermore, agreement costs such as negotiations and concessions made before finalizing a deal are also included. These are known as ex ante costs. However, transaction costs can also occur after a transaction has been completed — these are referred to as ex post costs. This includes processing fees or costs arising from the involvement of third-party service providers, such as intermediaries or carriers. Any subsequent adjustments to the transaction may also fall under transaction costs.

From a tax perspective, ex ante and ex post costs are treated differently. While ex ante costs are considered business-related expenses, ex post costs are deducted from the profit of the transaction, thus reducing taxable income.