Crypto Tax 101

Over the last few years, investing in virtual currencies (“cryptocurrency” or “crypto”) has become very popular. The IRS defines a virtual currency as a form of property and refers to virtual currency as a medium of exchange. There are various types of transactions that can occur with investing in virtual currency outside of buying and selling.

Different Types of Transactions

Outside of holding an investment in cryptocurrencies, the following are other types of transactions that can occur:

• • Mining
  • Receiving/spending cryptocurrency for goods and services
  • Exchange from one type of cryptocurrency for another
  • Airdrop or fork
  • Staking
  • Charitable contributions and gifts in cryptocurrency

Tax Considerations

These transactions have unique characterizations and tax implications. Not every transaction creates income or a taxable event. Taxable events include:

• • Selling a virtual currency for cash
  • Using a virtual currency to buy goods/services
  • Trading from one type of virtual currency to another
  • Mining and staking

Non-taxable events include:

• • Buying and holding a virtual currency
  • Donating virtual currency as a charitable contribution (with some exceptions)
  • Transferring a virtual currency from one wallet/or account to another

Mining is the process of creating virtual currencies and is performed by miners. In exchange for the creation, the minor earns income through transaction fees or block rewards. The IRS considers income earned from mining as ordinary income. The fair market value will be added as other income.

When an investor exchanges one virtual currency for another virtual currency, tax capital gain or loss is recognized for tax purposes. Transferring the same virtual currency to and from different wallets and/or accounts does not create a taxable event.

Virtual currencies can be used as an alternative to cash. When a business accepts a virtual currency as a form of payment, this payment is taxable income. The value that is received for the goods or services is equal to the fair market value at the date and time when the virtual currency is received. When disposing of a virtual currency, each transaction needs to be tracked even if it is used for spending purposes. These transactions are reportable on your tax return as dispositions when the virtual currency is used.

An airdrop is a marketing method used by startups. It is the creation of new virtual currency, usually given out for free to encourage adoption. This transaction creates a taxable ordinary income. A fork occurs when a virtual currency is split into two. It is a change in the blockchain. There are two types of forks: a hard fork and a soft fork. Only a hard fork creates a taxable event when it is followed by an airdrop. This income is reported as ordinary income.

Staking is when an investor holds virtual currency in a wallet to participate in maintaining the blockchain. This transaction is comparable to a savings account. This income is treated as income earned through mining and may be treated as self-employment income subject to self-employment tax.

Donation of Virtual Currency

You can donate virtual currency and receive a tax-deductible charitable contribution. The virtual currency must be held at least 12 months and be donated to a qualified charitable organization. This results in a tax deduction for the FMV of the virtual currency when donated and no recognition of taxable gain.

Frequently Asked Questions

• • Do I pay taxes on lost or stolen crypto?
    • Between 2018-2025, you cannot claim any deductions on your loss from lost or stolen crypto to offset gains.
  • What forms should you receive from your cryptocurrency platform?
    • Your broker will provide you with a 1099-B or an annual summary. Additionally, you may also be provided with a 1099-NEC or 1099-MISC.
  • As a donor, what are my donor acknowledgement responsibilities?
    • A charitable organization can provide a written acknowledge that the donor must obtain if claiming a deduction over $250 for the donation.
  • Do I report income when virtual currency was received as a bona fide gift?
    • No income is recognized for a bona fide gift until it is sold, exchanged, or disposed of.

If you have questions about how this topic will impact you, Team LittleOwl CPA is here to help. Schedule a discovery call today!

About Tabitha Regan

Tabitha Regan is the Founder and CEO of LittleOwl CPA. She is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.