IRS

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Taxable Receipts Of Cryptocurrencies (US)

The basics

If you sold your cryptocurrency, you need to report the transaction. If you wound up with a capital gain, you must pay the appropriate tax.

Cryptocurrency as salary or compensation

As an employee or a contractor getting paid in cryptocurrencies, is no difference to regular fiat salaries and will be taxed as ordinary income on your tax return. You must report this income at a fair market value (FMV) of crypto at the time you receive it.

Crypto-mining income

Mining is when computers solve complex math problems on the Bitcoin network, they produce new Bitcoin, and second, by solving computational math problems, bitcoin miners make the Bitcoin payment network trustworthy and secure, by verifying its transaction information. There are many other Cryptocurrencies which have the same reward mechanism.

If you conduct a mining operation as a hobby, you have to included in gross income of the coins you mined when declaring taxes. You will not be able to write off any hobby related expenses effective Jan 1, 2019. This also means that you will not be able to deduct equipment expenses, utilities, etc. on your tax return.

If your mining operation rises to the level of trade or business as opposed to a hobby, you are eligible deduct business related expenses. Income and expenses would be reported on Schedule C, depending on the underlying tax/business structure.

Receipt of staking rewards

With Proof of Stake (POS), crypto-miners can mine or validate block transactions based on the amount of coins a miner holds in their ewallet. POS was created as an alternative to Proof of Work (POW), which is the original consensus algorithm in Blockchain technology, used to confirm transactions and add new blocks to the chain.

Staking rewards closely resemble interest income. Therefore it would be taxed as interest income on Schedule B. The amount to be reported is the annual aggregated 'fair market value' FMV of rewards at the time you receive it.

Receipt on interest income arising from decentralized platforms

Decentralized Finance (DeFi) platforms allow users to collateralize their appreciated crypto positions to generate interest income, the most applicable current use-case, on-chain lending. This interest income will be credited to your wallet in a form of a cryptocurrency or a stable coin. This “receipt” category of the crypto question and taxed as interest income on Schedule B.

Receipt of coins pursuant to a hard fork

A tricky one, since you have no direct influence on it. A hard fork (or hardfork) is a radical change to a network's protocol that makes previously invalid blocks and transactions valid, or vice-versa. Initiated by the network developers where a second branch of that currency using the same basic code is created. Holders of crypto from the original Blockchain protocol will often receive automatically cryptocurrencies from the new 'hard forked' chain.

The new crypto coins you will have to recognize as ordinary income equivalent to the FMV at the time of received. This amount would go on Line 21 of Schedule 1.

Receipt of coins through an airdrop

An airdrop, in the cryptocurrency business, is a marketing stunt that involves sending free coins or tokens to wallet addresses in order to promote awareness of a new virtual currency/ Blockchain project. If small amounts of the new virtual currency are sent to wallets for free in return for a small service such as like, share or retweeting a post it is called a Bounty (Airdrop).

They are taxed as ordinary income at the time of the receipt. Also note that although Rev. Rul. 2019-24 talks about “airdrops pursuant to a hard fork” and this revenue ruling was not intended to address marketing airdrops.

Receipt of crypto rewards when you shop

Just today, e-commerce Giant Rakuten announced it will let its customers swap reward-points for crypto. Companies, websites and platforms that offer cryptocurrency as a reward when you shop work like cash back programs. This is a new development in the space and the IRS has not clarified related tax implications. However, the most conservative approach is to pay ordinary income taxes at the time you receive these shopping rewards in cryptocurrencies. These would most likely go on other income line on Schedule 1.

Non-Taxable Receipts Of Cryptocurrencies (US)

Receipt of cryptocurrencies after you purchase them from an exchange, ATM, dealer or other source

Buying Bitcoin or other Cryptocurrencies using USD or your local currency is not a taxable event. Keep good records of the basis (the amount you paid for it) because that will have the biggest impact on taxes when you sell your Bitcoin.

Receipt of cryptocurrencies after a Coin Swap or Coin migration

Token/ Coin Swaps closely resemble stock splits. It is the exchange of one cryptocurrency asset for another on a ratio of one-to-one, where the old asset is discarded and the new asset is awarded to token holders as a fully fungible replacement that shares the same market value. This happens most of the time, when Blockchain projects introduce their mainnet (upgrade of the network infrastructure). These events are generally non-taxable.

Receipt of coins as a gift

Mere receipt of a crypto as a gift does not create a taxable event. The basis of the gift you receive depends on whether you have a gain or loss at the time you sell it. Therefore, when you receive a gift, what is extremely important is to keep good records of 2 items: Donor’s basis and FMV of the cryptocurrency at the time you receive it. (A31)

Receipt of crypto from an exchange/wallet you control to another exchange/wallet you control (Transfers)

This is another common situation and transfers have no tax implication.

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Sources: Internal Revenue Service (U.S. Taxes), Investopia, Forbes, IWS FinTech