Most of the time, acquiring cryptocurrency is not in itself a taxable event: It’s only when you sell the crypto for fiat, trade it for another type of coin, or use it purchase something that you have a taxable event to report.
However, there are several situations where cryptocurrency is considered income by the IRS. And in those cases, acquiring the crypto is taxable.
When is cryptocurrency considered income?
The follow types of crypto activity create taxable income:
- Earning staking rewards
- Receiving coins in an airdrop
- Being paid for goods or services
How to report cryptocurrency income
Cryptocurrency income could be reported on Schedule 1, Schedule B, or Schedule C of your tax return. It depends on the type of activity and other situational factors; we recommend consulting a tax professional if you have questions about where to report specific income.
Whichever form you use, you’ll report the fair market value of the cryptocurrency you received at the time that you received it. It will be taxed at your normal income tax rate, just as if you had received payment in USD.
With staking rewards, you may be earning a small fraction of cryptocurrency coins every day, every hour, or every few minutes. Unfortunately, each of those deposits must be reported individually.
Income transactions in Bitcoin.Tax
If you’ve imported trades and some of those transactions are actually income, you can mark them as such and they’ll be moved to the Income tab of your Bitcoin.Tax account. You can also load income transactions by connecting to BitPay, Coinbase Commerce, or other accounts, or add income deposits manually.
Bitcoin.Tax will produce a downloadable report that you can attach to the proper form (Schedule 1, Schedule B, or Schedule C).
Future transactions with cryptocurrency income
Let’s say that you’re a freelance web designer who received 1 ETH as payment for a project; at the time, it was worth $1,000. You reported that $1,000 as income for the tax year in question. Now, what if you want to sell the ETH 2 years later?
The amount that you reported as income—in this case, $1,000—is considered your cost basis. If you sell the ETH for $1,200, you’ll have a capital gain of $200 to report.
Have more questions about your cryptocurrency tax return? Get personalized advice from a crypto tax attorney and CPA using our full-service tax preparation service.
Andrew Gordon is a cryptocurrency tax lawyer and Certified Public Accountant who has practiced cryptocurrency tax law since 2014. His firm, Gordon Law Group, has helped hundreds of virtual currency investors reconcile their crypto transaction data, file tax returns, amend previous returns, and fight crypto-related audits and tax bills.