On October 9, 2019, the IRS released further guidance on how virtual currency should be taxed. The last guidance, issued in 2014, explained that virtual currency is treated as property for Federal income tax purposes and applied tax principles applicable to transactions involving property to virtual currency.
Since then, virtual currency has continued to evolve, sparking many questions about if and how various virtual currency transactions should be taxed, like what happens when you receive an airdrop following a hard fork or what happens when you donate virtual currency to a charitable organization. IRS Rev. Rul. 2019-24 and FAQs clarify how you should report specific virtual currency transactions on your taxes.
Here is a breakdown of some key frequently asked questions that were clarified by the IRS since our earlier virtual currency article:
What is virtual currency?
Virtual currency is a digital representation of value that functions as a medium of exchange, unit of account, or store of value. In some environments, it operates like real currency like coins and paper money. Cryptocurrency utilizes cryptography to validate and secure digitally recorded transactions on a distributed ledger like a blockchain.
What is Convertible Virtual Currency?
When cryptocurrency has an equivalent value or acts as a substitute for real currency it is referred to as convertible virtual currency. Bitcoin is an example of convertible virtual currency since it can be digitally traded and can be purchased or exchanged into US dollars, Euros, and other real or virtual currencies.
How is virtual currency taxed?
The latest IRS guidance issued in 2014 explained that virtual currency like Bitcoin should be treated as property instead of currency for U.S. Federal tax purposes and general tax principles applicable to property transactions apply to transactions using virtual currency for federal income tax purposes. This means that the same rules that apply to property transactions like the sale of stocks apply to virtual currency. Additionally, how the virtual currency is used also has an impact on how the virtual currency is taxed.
Capital Gains and Losses
How is gain or loss calculated when I sell virtual currency?
Gain or loss is the difference between your cost (the amount spent, including fees, commissions, and other acquisition costs) in the virtual currency and the amount you received in exchange.
Will I recognize gain or loss if I exchange my virtual currency for other property?
Yes, when you exchange virtual currency held as a capital asset for other property, including goods or for other virtual currency, you will recognize a capital gain or loss. Your gain or loss is the difference between the fair market value (FMV) of the property you received and your adjusted cost basis of the virtual currency exchanged. Your adjusted cost basis of the virtual currency will include the amount spent, including fees, commissions, and other acquisition costs of the virtual currency that is being exchanged.
Will I recognize a gain or loss if I sell or exchange property for virtual currency?
Yes, if you transfer property held as a capital asset in exchange for virtual currency you will recognize a capital gain or loss. If the property exchanged is not a capital asset you will recognize an ordinary gain or loss.
Virtual Currency as Payment for Goods and Services
How Does the IRS Tax Cryptocurrency or Payouts Received if You Mine it?
If you mine cryptocurrency you will be taxed:
- When you receive the reward or payout for successful mining
- On any capital gain when you sale the cryptocurrency
If you receive cryptocurrency as a reward or payout for successful mining, it is taxed as ordinary income based on the fair market value (FMV) of the cryptocurrency or tokens the day you receive them. The tax rate is based on your ordinary tax rate which is dependent on your taxable income.
If you are mining as a hobby then the FMV of the cryptocurrency is reported as other income on your taxes. If you are running your own mining business you are considered self-employed and you will receive Form 1099-NEC from the payor at tax time if the value of your payout is $600 or more. You will report your reward or payout from your mining business as self-employment income when you file your taxes. Even if you don’t receive a Form 1099-NEC you should still claim your payout or reward when you file your taxes.
If you mine cryptocurrency as a business, just like any other business, then you may be able to deduct business-related expenses like electricity, equipment, repairs, and rented space. You must mine cryptocurrency as a business in order to deduct expenses. If you do it as a hobby you will not be able to claim any deductions related to mining the cryptocurrency.
Do I have to report income if someone pays me in virtual currency?
If you receive cryptocurrency as payment for services, it is taxed as ordinary income based on the fair market value (FMV) of the cryptocurrency the day you receive it. The tax rate is based on your ordinary tax rate which is dependent on your taxable income. If you are paid as an employee the cryptocurrency will be included in your W-2 based on the FMV at the time you received it. If you are paid as a contractor or freelancer, the FMV of the cryptocurrency you received will be reported on Form 1099-NEC by the payor if the value is $600 or more.
When you sell or exchange the cryptocurrency received for your services you will have a capital gain or loss and will be taxed on any gain when you dispose of the cryptocurrency.
How do I calculate my income if I receive payment in virtual currency?
The virtual currency received for payment of services should be valued at the fair market value, in U.S. dollars, the day of receipt. In an on-chain transaction, you receive the virtual currency on the date and the time that the transaction is recorded on the distributed ledger.
Virtual Currency as Gifts and Charitable Donations
I received virtual currency as a gift. Do I have to report income?
No, you will not recognize income until you sell, exchange, or dispose of the virtual currency.
What happens if I donate virtual currency to a charity? Will I have to recognize income, gain, or loss?
If you donate virtual currency to a recognized 501(c)(3) charitable organization, as defined by the Internal Revenue Code, you will not recognize income, gain, or loss. You may instead reap the benefit of a charitable contribution deduction. Your deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you held it for more than one year. If one year or less, your tax deduction is the lesser of your cost or the virtual currencies fair market value at the time of contribution.
Forks and Airdrops
One of my cryptocurrencies went through a hard fork but I did not receive new income. Do I have income to report?
No, if you did not receive new crypto, whether through an airdrop or another kind of transfer you don’t have taxable income.
What if my cryptocurrency went through a hard fork followed by an airdrop and I received new crypto?
Yes, you will have taxable income which will be taxed as ordinary income equal to the FMV of the new crypto when it’s received and the transaction is recorded, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency.
Do I have income when a soft fork of cryptocurrency I own occurs?
Since a soft fork does not result in the creation of new cryptocurrency the soft fork will not result in income.
*A hard fork occurs when a single cryptocurrency splits into two following a change to the existing code resulting in both an old version and a new version. An airdrop is the distribution of a cryptocurrency token or coin, usually for free.
You should receive a Form 1099 or Form W-2 to report your cryptocurrency transactions, but even if you don’t receive a form, you need to report your taxable transactions on your tax return. If you missed reporting any transactions in the past you can amend your previous years’ tax returns with TurboTax.
Don’t worry about knowing the tax implications of virtual currency. TurboTax Premier is up to date and will ask you simple questions about your virtual currency transactions and will accurately help you figure out your gains and losses on your transactions.
With TurboTax, now you can upload your transactions from cryptocurrency platforms at once, through compatible .csv files to TurboTax Premier. And the uploaded .csv files will include the cost basis of your transactions (if available), so TurboTax Premier can easily help you account for your gains and losses and report your cryptocurrency transactions. TurboTax Premier is designed to support crypto transactions along with a variety of other investment types.
TurboTax Premier can help you accurately figure out your gains and losses, and it’s the only major online tax preparation software that supports importing over 1,500 stock and 2,000 cryptocurrency transactions at once directly from financial institutions and cryptocurrency platforms, saving you time and ensuring accuracy. TurboTax Premier has partnered with over 300 financial institutions and investment platforms to allow you to auto-import your investment info seamlessly when doing your taxes.
If you have questions, you can also connect live via one-way video to a TurboTax Live Premier tax expert with an average 12 years experience to get your crypto investment questions answered. TurboTax Live Premier tax experts are available in English and Spanish, year-round and can also review, sign, and file your tax return or you can fully hand your taxes over to them from the comfort of your home.