US Crypto Income Events

• Tax classification of cryptocurrency — Convertible virtual currency (cryptocurrency) is treated as property for federal income tax purposes, not as currency. General tax principles applicable to property transactions apply. (No foreign currency gain/loss treatment.) (IRS Notice 2014-21, Q&A-1 and Q&A-2; IRC § 61)
• Receipt of crypto = gross income at FMV — Any receipt of cryptocurrency constitutes gross income in the amount of its fair market value (in U.S. dollars) at the date and time it is reduced to undisputed possession, i.e., when the taxpayer obtains dominion and control. Gross income means all income from whatever source derived, including undeniable accessions to wealth, clearly realized, over which the taxpayer has complete dominion. (IRC § 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Treas. Reg. § 1.61-1(a))
• Timing of inclusion (cash-method taxpayer) — A cash-method taxpayer includes an amount in gross income in the taxable year it is actually or constructively received (when the taxpayer gains dominion and control). An accrual-method taxpayer includes income no later than the year all events fixing the right to receive it have occurred. (IRC § 451; Treas. Reg. § 1.451-1, § 1.451-2)
• Basis of crypto received as income — When a taxpayer receives crypto that is not purchased, basis equals the amount included in gross income — i.e., the fair market value of the cryptocurrency in U.S. dollars when received. (Disposal gain/loss is out of scope of this skill.) (IRC § 1011, § 1012; Treas. Reg. § 1.61-2(d)(2)(i); IRS Notice 2014-21 Q&A-4)
• How FMV is determined — FMV is the U.S.-dollar value as of the date (and time, where dominion/control turns on it) of receipt. If listed on an exchange where the rate is set by market supply and demand, convert at the exchange rate in a reasonable manner that is consistently applied. (IRS Notice 2014-21, Q&A-5)
• Mining rewards = ordinary income at FMV on receipt — When a taxpayer successfully “mines” virtual currency (e.g., uses computer resources to validate transactions and maintain the public ledger), the fair market value of the virtual currency as of the date of receipt is includible in gross income. (IRS Notice 2014-21, Q&A-8)
• Basis of mined coins — Basis in mined cryptocurrency equals the fair market value in U.S. dollars recognized as income on the date of receipt. (IRS Notice 2014-21, Q&A-4 / Q&A-8; Treas. Reg. § 1.61-2(d)(2)(i))
• Self-employment tax on mining as a business — If a taxpayer's mining of virtual currency constitutes a trade or business and is not undertaken as an employee, the net earnings from self-employment (gross income from the business less allowable deductions) are self-employment income subject to self-employment tax. (IRS Notice 2014-21, Q&A-9; IRC § 1401, § 1402)
• Self-employment tax rate — 15.3% — 12.4% Social Security plus 2.9% Medicare. The 12.4% Social Security portion applies up to the annual Social Security wage base ($176,100 for 2025; $184,500 for 2026); the 2.9% Medicare portion has no cap. The lower individual income tax rates under IRC § 1(j) that apply to the underlying net earnings are made permanent by the OBBBA (§ 70101), so pre-2018 rates do not return after 2025. percent (IRC § 1401; IRS, Self-Employment Tax (Social Security and Medicare Taxes))
• SE tax base and $400 threshold — SE tax is computed on 92.35% of net earnings from self-employment (Schedule SE). A taxpayer must file Schedule SE and pay SE tax if net earnings from self-employment are $400 or more. USD (IRC § 1402(a), § 1402(b); IRS Schedule SE instructions)
• Deductible expenses of a mining business — A miner operating a trade or business may deduct ordinary and necessary business expenses (e.g., electricity, hardware/depreciation, hosting) against mining gross income in computing net earnings; these expenses are not deductible if the activity is a hobby. (IRC § 162; IRC § 183 (hobby contrast); IRS Notice 2014-21 Q&A-9)
• Hobby vs. trade or business — Whether mining is a trade or business (SE tax applies; expenses deductible) versus a hobby (income still taxable as ordinary income, but no SE tax and post-TCJA no deduction for hobby expenses) turns on whether the activity is carried on with continuity, regularity, and a primary purpose of profit. § 183 governs activities not engaged in for profit. (Hobby-expense deductions are disallowed as miscellaneous itemized deductions: the TCJA § 67(g) suspension applied for 2018–2025, and the OBBBA (§ 70110) makes that suspension permanent for taxable years beginning after December 31, 2025; hobby income remains fully taxable.) (IRC § 183; IRC § 162; Treas. Reg. § 1.183-2(b) (nine-factor test))
• Staking validation rewards are gross income — If a cash-method taxpayer stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units as validation rewards, the fair market value of the rewards is included in gross income. (Rev. Rul. 2023-14; IRC § 61)
• Timing — dominion and control — Staking rewards are included in gross income in the taxable year the taxpayer gains dominion and control over the rewards — i.e., when the taxpayer first has the ability to sell, exchange, or otherwise dispose of them. FMV is determined as of the date and time the taxpayer gains dominion and control. (Rev. Rul. 2023-14 (Holding); Treas. Reg. § 1.451-2)
• Staking through a centralized exchange — The same treatment applies when a taxpayer stakes through a cryptocurrency exchange and receives additional units as rewards as a result of the validation — the FMV of the rewards is income when the taxpayer gains dominion and control. (Rev. Rul. 2023-14 (Holding, second sentence))
• Basis of staking rewards — Basis in staking rewards equals the fair market value included in gross income on the date and time of dominion and control. (IRC § 1011; Treas. Reg. § 1.61-2(d)(2)(i); Rev. Rul. 2023-14)

Taxpayers (Joshua & Jessica Jarrett) have argued that newly created staking tokens are self-created property not taxable until sold. The first refund suit was dismissed as moot after the IRS refunded the 2019 tax (Jarrett v. United States, 6th Cir. No. 22-6023, Aug. 18, 2023). A second suit (M.D. Tenn., No. 3:24-cv-01209, filed Oct. 10, 2024) re-litigates the issue. The IRS's current position (Rev. Rul. 2023-14) remains income on receipt; the legal question is not finally settled by a court. (UNCERTAIN — active litigation challenging the income-on-receipt position; revenue rulings do not have the force of law and the courts have not ruled on the merits.) (Jarrett v. United States, No. 22-6023 (6th Cir. 2023); Jarrett v. United States, No. 3:24-cv-01209 (M.D. Tenn. filed Oct. 10, 2024))

• Airdrop = ordinary income at FMV when received — A taxpayer has gross income, ordinary in character, as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of the new cryptocurrency. The amount is the FMV of the units when the airdrop is recorded on the distributed ledger. (Rev. Rul. 2019-24 (Holding 2; Situation 2); IRC § 61)
• Airdrop timing — recorded on ledger + dominion/control — Cryptocurrency from an airdrop is generally received on the date and time it is recorded on the distributed ledger, provided the taxpayer can exercise dominion and control. If the taxpayer cannot dispose of it (e.g., a custodial exchange does not yet support the new coin), receipt is deferred until the taxpayer later acquires the ability to transfer, sell, exchange, or dispose of it. (Rev. Rul. 2019-24 (Background; Situation 2); IRC § 451)
• Basis of airdropped coins — Basis in airdropped cryptocurrency equals the amount of income recognized — the FMV of the units when the airdrop is recorded on the distributed ledger. (Rev. Rul. 2019-24 (Situation 2); IRC §§ 61, 1011; Treas. Reg. § 1.61-2(d)(2)(i))
• Hard fork without receipt of new coin = no income — A taxpayer does not have gross income as a result of a hard fork of a cryptocurrency the taxpayer owns if the taxpayer does not receive units of a new cryptocurrency (no accession to wealth). (Rev. Rul. 2019-24 (Holding 1; Situation 1); IRC § 61)
• Hard fork followed by airdrop of new coin = income — A hard fork followed by an airdrop that distributes units of the new cryptocurrency to the taxpayer's ledger address produces ordinary gross income equal to the FMV of the new units when received (recorded on the ledger with dominion/control). (Rev. Rul. 2019-24 (Holding 2; Situation 2); IRC §§ 61, 451)
• DeFi lending / yield interest — Interest or yield earned from lending cryptocurrency or supplying it to a DeFi protocol is includible in gross income at FMV when the taxpayer gains dominion and control, ordinary in character, under the general § 61 accession-to-wealth principle. There is no crypto-specific IRS ruling on DeFi interest. (UNCERTAIN — no DeFi-specific IRS guidance; treatment is by analogy to general § 61 income principles. Character (interest vs. other ordinary income) may depend on the arrangement.) (IRC § 61(a) (incl. § 61(a)(4) interest); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955))
• Liquidity pool deposits / withdrawals — Whether depositing crypto into, or withdrawing it from, a liquidity pool (often in exchange for LP tokens) is a taxable disposition or a non-recognition event has no specific IRS guidance. Conservative practice treats a deposit that exchanges one token for a materially different LP token as a potential taxable exchange; positions vary. (no-guidance / UNCERTAIN — the IRS has issued no ruling on liquidity-pool deposits or withdrawals; this is disposition/recognition territory bordering on basis (largely out of scope). Flag for taxpayer-specific advice.) (IRC § 61; IRC § 1001 (realization/exchange) — no crypto-specific guidance)
• Wrapping / bridging tokens — Whether wrapping a token (e.g., ETH to wETH) or bridging it to another chain is a taxable disposition under § 1001 or a non-taxable change in form is unsettled. No IRS guidance directly addresses wrapping or bridging. (no-guidance / UNCERTAIN — no IRS authority on wrapping or bridging; reasonable positions differ. (Recognition/basis is largely out of this skill's income scope.)) (IRC § 1001 — no crypto-specific guidance)
• Governance / liquidity-mining reward tokens — Reward tokens received for providing liquidity or for governance participation (liquidity mining) are includible in gross income at FMV when the taxpayer gains dominion and control, ordinary in character, under the general § 61 principle (analogous to staking rewards). (UNCERTAIN — no DeFi-specific IRS ruling; treatment is by analogy to staking-reward and general accession-to-wealth principles.) (IRC § 61; Rev. Rul. 2023-14 (by analogy); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955))
• Crypto interest / rewards accounts — Rewards or interest paid on crypto held in an interest-bearing or rewards account (centralized lending/earn programs) are includible in gross income at FMV when the taxpayer gains dominion and control, ordinary in character. (No crypto-specific ruling on earn-account rewards; treated under the general § 61 income principle.) (IRC § 61(a); IRS Notice 2014-21 (property/receipt principles))
• Referral and learn-and-earn rewards — Crypto received as a referral bonus or learn-and-earn reward is includible in gross income at FMV when received, ordinary in character, as an accession to wealth (akin to a rebate/incentive paid in property rather than a non-taxable purchase price adjustment). (UNCERTAIN — no crypto-specific guidance; some incentives received for a purchase may instead be a basis-reducing rebate. Fact-specific.) (IRC § 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955))
• Play-to-earn rewards — Cryptocurrency earned through play-to-earn games or platforms is includible in gross income at FMV when the taxpayer gains dominion and control, ordinary in character; if the activity rises to a trade or business, the net earnings may also be subject to self-employment tax. (UNCERTAIN — no crypto-specific IRS guidance for play-to-earn; treated under general § 61 / trade-or-business principles.) (IRC § 61(a); IRC § 1402 (SE tax if a business); IRS Notice 2014-21)
• When SE tax applies vs. not — Self-employment tax applies to crypto income only where the receipt arises from a trade or business carried on by a non-employee (e.g., business mining, contractor services paid in crypto, possibly business-scale play-to-earn). Investment-type receipts (staking on personal holdings, airdrops, hard-fork coins, ordinary investment rewards) are ordinary income but generally not subject to SE tax. (Whether staking/DeFi activity rises to a trade or business is fact-specific; the IRS has not ruled that passive staking is SE income.) (IRC § 1402(a); IRS Notice 2014-21 Q&A-9 and Q&A-10)