Understanding IRS Classifications of Cryptocurrency Transactions: Trading, Mining, Staking, and Airdrops

 

No doubt that the United States is the greatest financial power. Although cryptocurrencies emerged from U.S. but financial sectors took a negative attitude towards the crypto assets. But now it can be seen as positive because regulation getting stronger and the U.S. adopted a better regulatory framework for the Crypto market.

The IRS classification

IRS classified cryptocurrencies as property rather than currency. It means if you are holding the crypto assets the standard property tax rules apply to transactions involving crypto assets. Whatever the advantage you have taken from crypto assets, the IRS treats them similarly to those from real estate or stocks. It is important for crypto asset holders careful in record-keeping and reporting to their holdings.

Trading

Any time a cryptocurrency is sold or exchanged for another asset, you must pay the capital gains tax, even with other cryptocurrencies. If you are holding Bitcoin and want to swap with ETH, you must report any gains or losses based on the fair market value.

If you are holding the asset for a short term like less than one year, you are taxed at ordinary income rates, and if you are having it for long-term the tax is applied to you with reduced rates.

Mining Cryptocurrency

If you are mining cryptocurrencies, IRD treats them as ordinary income based on the fair market value. If you mine one Bitcoin valued at $50,000 on the day you receive it, that amount is reported as income.

If you have kept your mining income for later sale, the IRS applied a capital gain tax, and this should be reported on your tax report. You can deduct business-related expenses if you are qualifying as a business rather than a hobby.

Staking Cryptocurrency

The IRS treats all staking rewards as ordinary income at their fair market value. If you have earned 0.5 ETH through staking when its price is $1,000 per ETH. On your tax report, you should mention $500 as income. If you sell staked assets later, any profit or loss realized will be treated as capital gains or losses based on the sale price but relative to the initial basis.

Airdrops

The IRS treats airdropped tokens as ordinary income at their fair market value when received. For example, you are registered to receive $200 worth of tokens, this amount is taxable income. If you later sell these tokens for a profit, the transaction will also incur capital gains tax based on the difference between your selling price and the value reported as income at the time of receipt.

Finally, if you are holding crypto assets, you must maintain detailed records of all transactions involving cryptocurrencies — this includes dates of transactions, amounts involved, fair market values at transaction times, and any associated costs.