How does the IRS treat cryptocurrencies?

The IRS explained how current taxation rules apply to virtual currencies in Notice 2014-21 and Rev. Rul. 2019-24.

Here are some of the most important points to understand

  1. Virtual currency is treated as property, so general tax principles that apply to property transactions also apply to virtual currency transactions.
  2. You must report any capital gain or loss on the sale of virtual currency.
  3. When you obtain virtual currency by mining, your taxable income is equal to the fair market value of the virtual currency on the date of receipt.
  4. If a hard fork is followed by an airdrop, from which you receive new cryptocurrency, you will have taxable income. Assuming you immediately have dominion and control over the new crypto (i.e. you can transfer, sell, exchange, or dispose of it), your ordinary income is equal to its fair market value at the time the transaction is recorded on the distributed ledger.
  5. Property, including virtual currency, received in exchange for performing services is considered ordinary income, regardless of whether you provided the services as an employee. Your income is equal to the fair market value of the crypto at the time you receive it.
  6. By paying for a service with a capital asset such as virtual currency, you incur a capital gain or loss, which must be reported.
  7. When exchanging a capital asset like virtual currency for other property, including goods or another virtual currency, you realize a capital gain or loss. Your gain or loss is the difference between the fair market value of the property you received and the adjusted basis for the virtual currency exchanged.
  8. If you receive virtual currency as a bona fide gift, it is not recognized as income until you sell, exchange, or otherwise dispose of that virtual currency.

Please note that all U.S. citizens and residents are subject to federal income tax regardless of which country they live in, so they must report and pay taxes on crypto income.



DISCLAIMER: This post is for informational purposes only and should not be interpreted or relied upon as a substitute for the advice of financial, legal, or tax professionals. This content also only addresses U.S. federal income tax consequences for U.S. citizens and residents and does not address tax consequences that may be relevant to a particular person subject to special rules, such as dealers or traders. You should consult with your own financial, legal, or tax professionals to report and file your crypto taxes or make decisions on your particular circumstances. The laws, regulations, or interpretation of the existing laws could change, which may adversely affect either prospectively or retroactively. The content of this post is subject to changes.