How Does Cryptocurrency Taxation Work?

Selling or trading cryptocurrency for a profit is subject to taxes, as its fair market value determines its taxable amount – just like with other assets.

Mining crypto and using it to buy goods and services also has tax repercussions, however the pseudonymous nature of transactions using cryptocurrency could lead to widespread tax evasion which undercuts government revenues.


Airdrops in cryptocurrency are an efficient way for companies to distribute new tokens among existing coin holders, increasing brand recognition and product promotion while at the same time mitigating tax implications – it is vitally important that organizations understand how best to handle such events in order to remain compliant and avoid unnecessary tax complications.

The IRS has provided some guidance on how to report airdrops in the US. The key is determining when the taxable event occurs – usually when you “dominon and control” over assets you receive through an airdrop mechanism such as gas fees for claim rewards while others directly deposit coins into wallets.

When selling crypto assets, it is necessary to calculate any capital gain or loss and report it. This is calculated by comparing your sales proceeds with your basis in the asset and generally considered long-term capital gain, subject to lower tax rates than ordinary income. Conversely, any sale made within one year will be taxed as ordinary income and be subject to ordinary rates of taxation.

Airdrops require you to maintain an accurate cost basis. This will enable you to accurately determine whether or not selling tokens has generated profits, saving time when filing HMRC crypto tax reports and saving hours of work in preparation. An online tool like Koinly is an efficient way of doing this – use it now and save yourself hours of work in preparation of HMRC crypto tax reports!

Cryptocurrencies have gained widespread appeal, yet they don’t escape real-world tax liabilities. Indeed, their rapid rise has given rise to tangible tax liabilities you should be mindful of; failure to do so could incur penalties that are serious enough. Luckily, modern tools make managing crypto tax obligations and penalties straightforward: just track transactions and calculate capital gains before creating a comprehensive tax report for banks or Crunch accountants.

Hard Forks

Hard forking occurs when a cryptocurrency undergoes software modifications that cause its blockchain network to split. A hard fork usually creates two new blockchains with different rules and mining capabilities than their counterpart, creating what is known as a crypto airdrop to encourage adoption of the new system by existing holders of original cryptocurrency. It should be considered taxed event.

In 2019, the IRS issued Revenue Ruling 2019-24 which mandates that anyone receiving coins as a result of hard forks or airdrops should treat them as ordinary income, using their fair market value on the date they received them as their starting point for tax reporting. Unfortunately, many cryptocurrency users and exchanges argue that token prices fluctuate frequently making it hard to assess their fair market value at time of receipt.

The IRS does not agree with this position and has issued guidance that states a taxpayer does not realize income when their coin undergoes a hard fork or non-contentious airdrop; however, they recognize a taxpayer realizes income when they gain control of a newly forked cryptocurrency and can sell, trade or transfer them in an effective way.

Another key flaw with the Guidance is its failure to address what happens if a hard fork is followed by an airdrop, in which case taxpayers would receive both new forked cryptocurrency as well as their old cryptocurrency that was originally deposited into their wallets – this creates a complex scenario because new forked currencies typically have zero cost basis and may incur capital gains taxes when sold.

Before receiving clarity from the IRS on this matter, cryptocurrency holders should take extra caution in reporting hard fork or airdrop income. They should always consult a CPA or tax attorney prior to making decisions on cryptocurrency taxation matters and keep a log or ledger recording their purchases, sales, and events that occur; this will enable them to stay abreast of crypto tax reporting requirements.


Cryptocurrency taxation can be an intricate issue that depends on how and when the asset is sold. Generally speaking, the IRS views cryptocurrency assets like property and taxes their profits like stock assets. When one sells cryptocurrency their original cost basis (known as capital gains or losses) will be used to calculate capital gains or losses that are either taxable or can be offset against future capital gains made in that year. There may also be instances in which someone receives free cryptocurrency or has other forms of interest income that should also be treated as taxable events.

Many cryptocurrency trading operations take place through centralized exchanges, but some traders also utilize peer-to-peer brokers. Transactions that occur without regulation can make tax administration hard pressed to track them; however, the IRS has recently ramped up enforcement and surveillance against any possible cryptocurrency tax evasion – something which may make using popular cryptocurrencies in future more challenging.

Crypto is generally taxed when sold for a profit, such as when sold to cash, exchanged between cryptocurrencies or used to pay goods and services. Also, some individuals receive compensation in crypto for work done or services performed, and this coin value should be reported as income to tax authorities. Airdrops and hard forks need to be reported separately for record keeping reasons; although not considered tax liabilities.

Hard forks are major events that occur within the crypto industry. Akin to software updates, hard forks alter existing code and add features to an existing coin, including making old coins no longer valid and issuing new coins with different values as new currencies altogether.

The Canada Revenue Agency treats cryptocurrency like property for tax purposes, meaning profits from sales are subject to capital gains tax rates based on how long an asset was held; those held for less than a year qualify for short-term rates while assets held over 12 months qualify for long-term ones.


The IRS doesn’t tax cryptocurrency directly; however, they will do so if you sell, trade, or otherwise dispose of it and recognize a gain. This could include direct sales to another individual or exchanges on public marketplaces – in these situations you will need to report and pay taxes on any differences between its purchase price and fair market value at time of sale or exchange – the latter defined by CRA as amount agreed upon between willing buyer and seller in an open and unrestricted market; alternative methods exist such as using cost-basis approach or midday value averaged across several high volume exchange brokers in order to calculate fair market value at time of sale or exchange – once these changes take place you will need to report and pay taxes accordingly

Purchase and holding cryptocurrency long term can create a substantial capital gains liability. That’s because its value may increase over time, leading to tax liability when sold for profit. When selling, deducting the original purchase price or cost basis from its fair market value at time of sale will reveal your capital gains liability.

Some cryptocurrencies offer free tokens to their users as an incentive for adoption and participation, known as airdrops, as an inducement to do business on their platform. Airdrops should be reported as capital gains realization events. Furthermore, hard forks occur when blockchain networks upgrade with new software or rules, which result in additional crypto coins to report as part of your transaction history.

Since their debut in 2009, cryptocurrency‘s rapid development has presented investors and tax systems alike with many challenges. Because many crypto transactions take place anonymously or with little record keeping available to them, people may fail to meet their tax obligations and face possible penalties; it is therefore vital that individuals understand how these new financial tools operate so that they may comply with their obligations to meet them in full. It is therefore essential for individuals to gain an understanding of these new tools’ workings so they may meet them efficiently in terms of tax obligations and penalties.