Understanding the distinction between capital gains and ordinary income is crucial for accurate tax reporting and compliance. United States (U.S.) taxpayers should be aware of different cryptocurrency events taxable as ordinary income in the U.S.

Mining Rewards

When cryptocurrency miners successfully validate transactions on a blockchain network, they are rewarded with newly created coins. The value of these coins at the time of receipt is considered ordinary income.

Rewards from Staking

Staking involves holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Users who participate in staking can earn rewards through additional coins. According to the IRS Revenue Ruling 2023-14, these rewards must be included in gross income for the taxable year in which the taxpayer acquires dominion and control over the rewarded cryptocurrency. This means that if you sell or transfer the staked assets, you will need to report the income from the rewards as fair market value at that point in time.

Earning through Airdrops and Hard Forks

Airdrops occur when cryptocurrency projects distribute free tokens to holders of a particular cryptocurrency. Similarly, hard forks can result in the creation of new cryptocurrencies. The value of tokens received through airdrops or hard forks is considered ordinary income.

Income from Freelancing or Selling Goods and Services

Individuals who receive cryptocurrency in exchange for providing services or selling goods must report the fair market value of the coins received as ordinary income.

Interest and Dividends

Some platforms offer interest or dividend payments to users who hold specific cryptocurrencies. These payments are taxable as ordinary income in the U.S..

Educational Rewards

In the U.S., learning rewards, such as those received from cryptocurrency exchange platforms for completing educational modules, are considered taxable income. According to the IRS, you must report these rewards as income at the time you receive them, even if you have not sold or exchanged the cryptocurrency.

It’s essential to keep detailed records of all cryptocurrency transactions to report them accurately on your tax return. Failure to report cryptocurrency transactions can lead to penalties and interest charges from the IRS. By staying informed and complying with tax regulations, you can ensure that your cryptocurrency activities are transparent and compliant with the law.

By understanding the various sources of ordinary income in cryptocurrency and cryptocurrency taxable events of ordinary income, individuals can ensure compliance with tax regulations and accurately report their earnings to the Internal Revenue Service (IRS). At Wiligent, we specialize in cryptocurrency taxation and can help you navigate the complexities of crypto tax laws to ensure that your financial activities are fully compliant with regulations.

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