Income Tax
In general, any cryptocurrency that you receive but have not โ€œboughtโ€ can be classified as ordinary income and should be reported under either the โ€œother incomeโ€ section, Schedule B, or Schedule C of your income tax return. The location on your tax return will depend on whether the income was from a trade or business, an isolated event, or passive activity.
These transactions generate ordinary income:
Note: Certain DeFi (or decentralized finance) rewards are considered ordinary income. Please consult your accountant or tax attorney for questions regarding your DeFi activity and its tax implications.
For individuals, think of ordinary income as your paycheck from your employer, any payments made to you for freelance work, receiving a gift containing fiat currency, etc. Currency received under these circumstances would be considered ordinary income and subject to the ordinary income tax rate.
For businesses, cryptocurrency could also be business income, which could allow you to deduct business expenses. Please consult your accountant or tax attorney for which items could be deducted from your tax liability.
A good rule of thumb for ordinary income is: If you sell or exchange cryptocurrency not held as a capital asset, you will realize ordinary gain or loss.[1] [2]
[2] I.R.S. Rev. Rul. 2019-24 https://www.irs.gov/pub/irs-drop/rr-19-24.pdf.
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