Many individuals will find themselves working with a variety of types of rewards from cryptocurrency. This can include Airdrops, Staking Rewards, Interest Rewards, Card Spending Rewards, Mining Rewards, and Hard forks. In this article, we will provide you with information on how these types of transactions are handled in TaxBit.
How are Mining rewards, Airdrops, Staking Rewards, Interest Rewards, and Hard forks taxed?
The IRS has provided enough guidance to determine that airdrops, forks, interest rewards, mining rewards, or staking rewards are income at the time of receipt. This means that when you plug one of these transactions into TaxBit and it's marked as income, TaxBit will determine the FMV (Fair Market Value) at the time of receipt, and record it's USD Value on your income report.
Our recommendation is based on IRS guidelines that are specific to airdrops and other ways to receive assets. It's a conservative interpretation that minimizes audit risk. Any other treatment is more risky as a result.
The value recorded in USD, then becomes your Cost Basis for the asset.
Does this mean I will be taxed twice, when I dispose of the asset?
When you dispose of an asset you earned as a reward, there is a taxable event that is recorded on your form 8949. This will take into account your reported income amount though, and you will not be taxed on the same dollars twice.
Here is an example to help illustrate this:
On January 13th, 2021 you earned 0.1 ETH in mining rewards which is worth $121.8 at the time of receipt.
On May 8th, 2021 you dispose of that 0.1 ETH and receive proceeds of $392.8
The initial income amount of $121.80 is taxable as ordinary income on your tax return. Then, the difference in value between when you acquired it to when you disposed of it ($271) is taxable as short term capital gains and it would be reported on your form 8949.
How are Card Spending Rewards Taxed?
Card Spending Rewards (Think, 2% back on your Visa card for every dollar you spend) are unique from other types of rewards. Historically card providers have not issued a form reporting this income, and it's generally considered to not be income so long as it's tied exclusively to spending activity*. If you receive a different type of reward like a sign up bonus, that would still be taxable. This means that when you plug one of these transactions into TaxBit and it's marked as a Card Reward, TaxBit will determine the FMV (Fair Market Value) at the time of receipt to establish a cost basis, but you will not have this value added to your income report.
Please Note: Crypto.com card rewards require that a user stakes differing amounts of crypto to earn different percentages of rewards. The CSV export received from Crypto.com does not delineate between rewards tied to spending and staking, as opposed to those earned just for spending. So for crypto.com card rewards, the transactions will be recorded as income. If you would prefer to take a less conservative approach to how these rewards are treated, you can simply choose not to report this income on your tax filing as other income. We do not recommend this, however reporting is ultimately the responsibility of the individual tax payer.
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