How to Calculate Cryptocurrency Tax Liability on Airdrops, Forks, Mining, and Staking Rewards

Cryptocurrency is becoming more and more popular these days, but many people are still confused about how to handle the taxes on things like airdrops, forks, mining, and staking rewards. I want to walk through the key things you need to know in a simple, easy-to-understand way so you can make sure you are paying your crypto taxes properly!

Airdrops

Let’s start with airdrops. An airdrop is when you suddenly receive a cryptocurrency token into your wallet without directly buying it. Some common examples are Uniswap’s UNI token airdrop in 2020 and various NFT projects that airdrop tokens to wallets holding their NFTs.

The IRS considers airdrops to be taxable income. You need to calculate the fair market value of the tokens on the day you received them and report that dollar amount as “other income” on your tax return.

For example, let’s say you received 400 UNI tokens from the Uniswap airdrop on September 1, 2020. On that day, UNI was trading around $2 per token. So you would report $800 ($2 x 400 tokens) as other income on your taxes for the year you received the airdrop.

It can be tricky to figure out the value if there is no active trading market for a new token. In that case, you need to make a good faith estimate of the value based on comparable cryptocurrencies. The main thing is documenting your logic so you can defend it if challenged by the IRS later.

When you eventually sell the tokens from the airdrop, you will also owe capital gains taxes based on any appreciation from the value you originally reported as income.

So in our example, let’s say you sold the 400 UNI tokens in 2021 when UNI was trading at $10 per token. That’s $4,000 total proceeds. You would report a capital gain of $3,200 ($4,000 proceeds – $800 cost basis).

Hard Forks

What about hard forks? A hard fork is when a cryptocurrency splits into two separate blockchains, with token holders receiving an equal amount of the new forked currency.

The most famous example is the Bitcoin Cash hard fork from Bitcoin. If you held Bitcoin at the time of the fork, you received an equal amount of Bitcoin Cash.

The IRS treats hard fork cryptocurrencies as taxable income, just like airdrops. You need to report the fair market value of the forked tokens you received as ordinary income.

For example, let’s say you received 10 Bitcoin Cash when it forked from Bitcoin on August 1, 2017. The value of Bitcoin Cash that day was around $300 per token, so you would report $3,000 ($300 x 10 tokens) as other income for the 2017 tax year.

When you sell the forked tokens, you’ll owe capital gains taxes based on any appreciation from the value you originally reported as income.

So if you sold those 10 Bitcoin Cash tokens in 2018 when they were worth $600 each, you would report proceeds of $6,000 and a capital gain of $3,000 ($6,000 proceeds – $3,000 cost basis).

Mining

If you mine cryptocurrency, the IRS considers any coins you successfully mine to be taxable income. The value is based on the fair market value of the cryptocurrency on the day you mined it.

This income gets reported on your taxes as self-employment income on Schedule C. You can deduct allowable mining expenses like hardware, electricity, etc. to calculate your net mining income.

When you sell the mined crypto, you will owe capital gains taxes based on any appreciation from the value you originally reported as self-employment income.

So if you mined 1 Bitcoin in 2015 when the value was $300, you would report $300 of self-employment income for 2015. If you then sold that Bitcoin in 2017 for $2,000, you would report a capital gain of $1,700 ($2,000 proceeds – $300 cost basis).

Staking Rewards

Finally, let’s talk about staking rewards. Staking is when you deposit your crypto tokens to help validate transactions on proof-of-stake blockchains like Ethereum, Solana, or Cardano. In exchange, you earn more tokens as a reward for staking.

The IRS considers staking rewards to be taxable income, similar to mining. The fair market value of the rewards you receive gets reported as “other income” on your taxes.

For example, let’s say you received 100 ADA tokens in staking rewards when ADA was worth $1 per token. You would report $100 of other income on your taxes.

When you sell the staked tokens, you’ll owe capital gains taxes based on any increase in value from when you first reported them as income.

So if you later sold those 100 ADA for $2 per token, you would have $200 in proceeds and a $100 capital gain ($200 proceeds – $100 cost basis).

Tracking Everything

As you can see, properly tracking and reporting crypto income events like airdrops, forks, mining, and staking can get complicated!

I recommend using a crypto tax software like CoinTracker or ZenLedger to automatically generate your tax reports across all your wallets and transactions. This makes the reporting process much simpler.

The key is being diligent about reporting all your cryptocurrency income, gains, and losses accurately based on the fair market value at the time you acquired the crypto.

Document everything and keep detailed records so you are prepared if the IRS comes asking questions later on. Paying your crypto taxes properly takes some work upfront, but avoids huge headaches down the road.

I hope this guide gives you a good overview of how cryptocurrency airdrops, forks, mining, and staking rewards are treated for tax purposes! Let me know if you have any other crypto tax questions.