When it comes to the taxes that the Internal Revenue Service (IRS) collects, they are largely divided into two categories: income and investments.

Income comes from employment or self employment. In addition, the IRS also classifies royalties, dividends, and interest as income—and not investments. Income taxes range from 10 – 37% and increase as one’s income increases. Investments that are profitably sold are subject to either short- or long-term capital gains taxes. Long-term capital gains tax rates range from 0 – 20% (again based on your income) while the short-term capital gains tax rates mirror those for regular income. Any monetarily significant asset is classified as a capital asset, including: real estate, artwork, stocks, and yes—cryptocurrency.

If you receive crypto as a salary, it is taxed as income (but any price appreciation when converted to USD would be taxed as capital gains). If you bought cryptocurrency and later sold it for USD, traded it for another crypto, or used it to make a purchase, it would be taxed as a capital asset.

Beyond these two scenarios, there are a number of other ways that one could receive crypto. For many, how the IRS taxes them is somewhat confusing and obtuse–partly thanks to the lack of clarity over the years from the IRS itself. Let’s dive into how airdrops, hard forks, and various other blockchain-based processes are classified for tax purposes.

What is classified as crypto earned income?

A good starting guideline is that anything other than directly investing in crypto is classified as taxable income—and not investment income. While receiving a salary in crypto is obviously income, so are a bunch of other crypto and blockchain processes. Let’s get started!

Crypto airdrops and hard forks

Sometimes you have to put in some work or meet some specific requirement to receive an airdrop—and sometimes you don’t. You may receive an airdrop for merely downloading a wallet or using a specific decentralized finance (DeFi) protocol. Regardless of the specific circumstances, airdrops are similar to winning a giveaway or lottery.

Hard forks result when a blockchain protocol is split into two separate networks and is treated in the same way; examples include the Bitcoin fork that created Bitcoin Cash and the Ethereum fork that created Ethereum Classic. Airdrops and hard forks are both taxed as crypto earned income. The tax is calculated based on the fair market value (FMV) when the airdrop was received. For all of the following scenarios, the FMV will be calculated in this way as well.

Crypto Tax Calculator automatically categorizes major airdrops and forks.  You can toggle the tax settings for income received through mining, forks and airdrops to suit both individual and business entities. You can use DECRYPT2024 for 20% off all plans with Crypto Tax Calculator.

Crypto mining

Some earn crypto by mining it on proof-of-work (PoW) blockchains such as Bitcoin, Litecoin or Dogecoin. This acquired crypto is considered regular income. For those mining crypto as a hobby, you can list mining expenses like hardware and electricity costs as itemized deductions. Crypto income is filed as “Additional Income and Adjustments to Income” on Form 1040. For professional miners, both expenses and income are reported on a Schedule C or on business-specific Forms 1065, 1120, or 1120S.

Crypto staking

In 2023, the IRS updated its guidance to clarify that staking rewards are treated as taxable income once received. The IRS states that the FMV of the staking rewards are included in your gross income in the tax year "in which the taxpayer gains dominion and control over the validation rewards," in other words, when the staking rewards are claimed, rather than when they are sold. The FMV is taken as the value of the asset at the the staking rewards are claimed.

Some have challenged this view of staking rewards income, arguing that staking is creating new property and these coins should not be taxed when received—but rather when they are sold or traded. The rationale is that this is newly created property. For example, a woodworker wouldn’t be taxed upon finishing a bookshelf or a baker taxed after baking some cookies; they are only taxed when these items are sold.

The Jarrett v. USA case saw this argument play out in the courts, with the plaintiffs arguing that staking isn’t income. However, before the outcome of the case could be determined, the IRS issued the updated guidance above.

"“The IRS makes clear in their guidelines that staking rewards are a form of income," a spokesperson for CryptoTaxCalculator told Decrypt. "Unless this is successfully overturned in court, it would be wise to do what the IRS suggests."

Crypto Tax Calculator can automatically detect staking rewards, and gives users the option to treat them as income or non-taxable capital acquisitions depending on which treatment you decide is right for you.

Crypto income can also incur capital gains taxes

The list above includes an assortment of processes and actions that are considered crypto earned income, but keep in mind you could be required to pay capital gains taxes in addition to income taxes. This would happen if your crypto appreciated between the time you received it and the time you sold it. It doesn’t matter if it was a crypto salary, airdrop, or mining rewards—any price appreciation would be taxed as capital gains based on the price differential. If the price depreciated prior to sale, you wouldn’t owe capital gains—but you would be able to harvest capital losses to lower your tax bill.

The only likely way that you wouldn’t incur capital gains in these situations is if you were to immediately sell the crypto as soon as you received it so there wouldn’t be time for the asset’s price to move (or you received stablecoins that don’t fluctuate in value in comparison to USD). So while the IRS expects you to classify the above processes as income, you’ll still need to pay capital gains taxes on the delta (the difference) between the received price valuation and the sale price for profitable trades.

The reality for many crypto investors is that they may have hundred or even thousands of crypto transactions that could fall into multiple of these categories. Couple this with multiple wallets across different blockchains, different exchange accounts and murky blockchain data, the situation quickly turns into a full blown tax nightmare. Using reputable tax software that can handle complex on-chain transactions across DeFi protocols, such as Crypto Tax Calculator, can make the whole process a lot smoother and help you sleep soundly at night. You can use DECRYPT2024 for 20% off all plans with Crypto Tax Calculator.

Cheat Sheet

• If you earned crypto from a job, crypto mining, lending, airdrop, hard fork, or any other non-investing activity, the IRS likely considers these crypto earnings to be regular taxable income.
• Crypto income will also be subject to capital gains taxes if it appreciates in value between date of receipt and the date of disposal (sale, trade, or purchase).
• As of 2024, staking rewards are classed as income by the IRS upon claiming.