Crypto interest income taxes

Several protocols, like BlockFi, offer users interest based rewards for holding cryptocurrencies, while many DeFi platforms offer their clients rewards for staking cryptocurrency. Crypto interest and crypto staking gains are both taxed as personal income.

Crypto margin trading

Most crypto exchanges offer margin trading. A margin trade consists of borrowing funds from an exchange to execute a trade and repaying the loan at a later point in time.

Although the IRS has not yet provided guidance on how crypto margin transactions should be taxed, the conservative and likely best approach is to treat the borrowed funds as an investment and pay capital gains on the margin based profit and loss.

ICOs (Initial Coin Offering)

Initial coin offerings are the equivalent of an initial public offering (IPO) – when a company offers shares to the public to raise capital. Investors may receive several different types of tokens in an ICO:

• Utility tokens – for help in using a specific product.
• Governance tokens – provides a vote or say to influence company policy and decision making.
• Equity tokens – represent equity shares that can be sold at a gain or loss.

Crypto ICOs are taxed differently for those launching the offering vs. investors buying into the offer, just as with a traditional IPO.

For the organization launching the ICO, investments received are treated as a type of income and income tax will need to be paid on all proceeds regardless of whether fiat currencies or cryptocurrencies are used for the funding.

For investors, most taxing authorities have not yet issued specific ICO tax policy but it is best to follow the tax treatment of IPOs as guidance. Meaning that most likely, no taxable event is triggered at the point of the investment, only when ICO assets are later sold, swapped or traded that capital gains are taxed on any profits.

Hard forks

“Hard forks“ – when a cryptocurrency undergoes a fundamental protocol change which results in a permanent diversion from the original ledger and creates a new blockchain, the newly forked crypto is taxed as income. The cost basis in the newly held cryptocurrency becomes the realized income. Hard Forks are considered a taxable event despite being an involuntary transaction by the owner or holder of the asset or token.

Forks are used to add new functions, improve security or resolve user disagreements.

Soft Forks

“Soft Forks” are an update to a blockchain but do not split the blockchain and are backward compatible.

Soft Forks are not subject to any tax as no new coins or tokens are received.

Airdrops

An airdrop is an unsolicited distribution of a cryptocurrency token or coin, usually for free, to numerous wallet addresses. Airdrops are often associated with the launch of a new cryptocurrency or a DeFi protocol, primarily as a way of gaining attention and new followers, resulting in a larger user base and a wider disbursement of coins. Airdrops have been a more important part of ICO after the crypto entrepreneurs have started doing private sales instead of public sales to raise initial amount.

The IRS is clear in its guidance regarding the income treatment of airdrops. Crypto received from an airdrop is taxed as income. If sold, traded, or otherwise disposed in the future, capital gains or losses are incurred depending on how the price of the tokens has fluctuated since initial purchase.

Crypto donations

Cryptocurrency donations are tax free and deductible so long as they are donated to a registered charity. Any deduction claims larger than $500 need to be reported on IRS Form 8283.

The amount of a donation that is tax deductible depends on how long the assets have been held:

If the crypto has been held for 1 year or more, the crypto’s fair market value can be claimed.

For crypto held for less than 1 year, deductions can be claimed for whichever is lower: the fair market value or the cost basis of the asset.

Crypto gifts

Cryptocurrency gifts are usually tax-free, however, if the donation exceeds a fair market value of $15,000, a gift tax return will need to be filed.

Crypto as a tax investment – helping to reshape taxes and cities

CityCoins is now offering a new and disruptive type of crypto token that enables “an opt-in tax of opportunity, as opposed to obligation,” where investors boost a specific city with cryptocurrency because they have faith in the municipality and its mission. This crypto token is being offered in Austin, TX, NYC and other cities across the globe. This concept may actually help shape future US crypto tax policy. More information about the concept is available here.