Receiving cryptocurrency rewards
When receiving cryptocurrency rewards, a general rule of thumb is that this is considered general income. As the IRS defines income as from โ€œall sources,โ€ when you receive cryptocurrency as a reward, it should be considered as income and subject to Income Taxes.

Staking

  • Networks operating a Proof of Stake mechanism (such as those operating on the Ethereum [or ET]) blockchain) reward participants for holding cryptocurrency whilst contributing to the operation of a blockchain.
  • Income from cryptocurrency staking is treated similarly to mining income. Those who generate an income from staking should determine if their activity is classed as a hobby or a business and should report on Form 1040 Schedule 1 or Schedule C - Profit or Loss from Business respectively.

Masternodes

A Masternode hosts an entire copy of a coinโ€™s ledger. Blockchain networks operating in this way reward the Masternode with cryptocurrency. As this crypto is received in the same way as mined crypto it is treated in the same way for tax. Similarly, it may also be a business or simply a hobby.

Tax on Cryptocurrency Loans

The income generated from lending cryptocurrency for interest should be taxed in the same way as mining and staking. The interest is treated as income at the fair market value at the time received.

Borrowing Against Your Cryptocurrency

  • The IRS does not currently consider a loan against cryptocurrency (or a loan in general) as a taxable event. Because of this, some choose this option as an alternative to selling cryptocurrency for fiat currency which would incur capital gains tax (and fees).
  • It is however a risk and if the cryptoโ€™s value falls dramatically many providers will liquidate. If this happens and there is a sale then this is treated as such and capital gains tax is applied as per the rules on capital gains as discussed in previous sections.

Tax on Proceeds from ICOs / IEOs

Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) are both methods of raising funds for a new cryptocurrency offering. In an ICO, basically anyone can participate. In an IEO, only members of the exchange can.
The type of tokens received fall into two categories. Either they are:
  1. 1.
    utility tokens, which provide the holder with access to goods or services on a platform usually using Distributed Ledger Technology (such as Ethereum) or
  2. 2.
    security tokens, which provide the holder with particular interests in a business, including debt due by the business or a share of the profits of a business.
Regardless of which type of token the holder receives, the IRS treats these tokens the same. The IRS recognizes that a taxable event occurs when you exchange one cryptocurrency for another. In an ICO/IEO, you may receive the tokens in the future. Then you will not recognize gain until you receive the token. However, the cost basis is derived from when the sale or exchange of the cryptocurrency occurred, and as such, your cost basis will relate back to the date where you originally participated in the ICO/IEO.
To further illustrate this, letโ€™s use an example:
Example
  • Sam exchanged 50 Token A for 1000 Token B on 03/22/2018
  • Sam received 1000 Token B on 04/02/2018
  • The cost-basis for Token B will be the fair market value of 50 Token A on 03/22/2018.
  • Although Sam did not receive Token B until 04/02/2018, the exchange from Token A occurred on 03/22/2018.
  • As such, the cost basis will be derived from the original cost of the exchange on 03/22/2018.