US Crypto Income Tax Guide 2025

What is Crypto Income?

Cryptocurrency income includes any crypto received as payment for goods or services, compensation for work, or rewards for activities. The IRS treats crypto income the same as traditional income - it's taxable when received at fair market value.

Types of Crypto Income

• Salary/wages: Receiving salary or wages paid in cryptocurrency
• Payments for services: Getting paid in crypto as a freelancer or contractor
• Payment for goods: Receiving crypto in exchange for selling products
• Airdrops: Free tokens distributed to wallet holders
• Hard forks: New coins from blockchain splits
• Referral bonuses: Rewards for referring new users to exchanges
• Learn-to-earn: Coinbase Earn, Binance Learn & Earn, etc.
• Play-to-earn: Gaming rewards (Axie Infinity, Decentraland, etc.)
• Promotional rewards: Sign-up bonuses, trading competitions
• Bounties: Bug bounties, content creation rewards

IRS Treatment of Crypto Income

The IRS has provided clear guidance that cryptocurrency received as income is taxable:

IRS Notice 2014-21

"If a taxpayer's mining of virtual currency constitutes a trade or business, and the mining activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income..."

IRS Virtual Currency FAQ (2023)

The IRS confirms that receiving cryptocurrency as payment for goods or services is taxable income, and the fair market value (in USD) at the time of receipt must be included in gross income.

Revenue Ruling 2023-14

This ruling (primarily about staking) reinforced the principle that cryptocurrency is taxable when you gain "dominion and control" over it, meaning you can use, sell, or transfer it.

When is Crypto Income Taxable?

Cryptocurrency income is taxable when you receive it and gain dominion and control. The taxable amount is the fair market value in USD at the time of receipt.

Receipt Date Examples

How to Calculate Income Value

Fair Market Value (FMV)

Fair market value is the USD price of the cryptocurrency at the time you received it. Use:

• Exchange rate: Price from a reputable exchange (Coinbase, Kraken, Binance.US)
• Closing price: End-of-day price if received at a specific time
• Average price: Daily average if exact timing is unclear
• Cost basis tracking: Use the same method consistently

Example Calculation

Scenario: You complete a freelance project and receive 0.5 ETH on March 15, 2025. ETH is trading at $3,200 at the time.

• Amount received: 0.5 ETH
• FMV at receipt: $3,200 per ETH
• Taxable income: 0.5 × $3,200 = $1,600
• Cost basis: $1,600 (for future capital gains)

Tax Rates and Brackets

Ordinary Income Tax Rates (2025)

Crypto income is taxed at ordinary income tax rates:

Self-Employment vs Ordinary Income

Ordinary Income (W-2 Employment)

If you receive crypto as an employee:

• Reported on Form W-2 by your employer
• Subject to income tax withholding
• Subject to FICA taxes (Social Security + Medicare = 7.65% employee + 7.65% employer)
• Employer handles withholding and reports FMV in USD

Self-Employment Income (Schedule C)

If you receive crypto as a freelancer, contractor, or business owner:

• Report on Schedule C (Profit or Loss from Business)
• Subject to self-employment tax (15.3% = 12.4% Social Security + 2.9% Medicare)
• Can deduct business expenses (equipment, software, fees, etc.)
• May need to pay quarterly estimated taxes

Total Tax Burden Example

Scenario: You earn $50,000 in crypto income as a self-employed freelancer (single filer).

• Income tax (22% bracket): ~$8,000
• Self-employment tax (15.3%): ~$7,065
• Total federal tax: ~$15,065 (30%)

Note: You can deduct 50% of self-employment tax, reducing taxable income.

Hard Forks and Airdrops

IRS Revenue Ruling 2019-24

The IRS issued specific guidance on hard forks and airdrops:

Hard Forks (Without Airdrop)

If a blockchain hard forks but you don't receive new coins:

• No taxable income
• Example: Bitcoin Cash fork - if you held BTC but never claimed BCH, no income

Hard Forks (With Airdrop)

If a hard fork results in you receiving new cryptocurrency:

• Taxable income when received
• FMV = fair market value when you gain dominion and control
• Cost basis = income value

Airdrops

Standard airdrops (promotional distributions):

• Taxable as ordinary income when received
• FMV at receipt = taxable amount
• Dominion and control test: Taxable when you can sell, trade, or transfer

Non-Taxable Airdrops

Some airdrops may not be immediately taxable:

• Unvested tokens: Locked tokens you can't access yet
• Non-transferable tokens: Tokens with no market or transfer ability
• Unsupported tokens: Tokens sent to your wallet that you can't access

These become taxable when you gain dominion and control.

Example: Uniswap (UNI) Airdrop (2020)

Uniswap airdropped 400 UNI tokens to early users in September 2020.

• Amount: 400 UNI
• FMV at claim: ~$3 per UNI = $1,200
• Taxable income: $1,200 ordinary income
• Cost basis: $1,200 (or $3/UNI)

Crypto Salary and Employment Income

Receiving Salary in Crypto

If your employer pays you in cryptocurrency:

• Treated as ordinary wages
• Subject to income tax withholding
• Subject to FICA taxes (Social Security + Medicare)
• Reported on Form W-2 in USD value
• FMV at receipt = wage amount

Employer Responsibilities

Employers paying in crypto must:

• Calculate USD value at time of payment
• Withhold federal income tax
• Withhold and pay FICA taxes
• Issue Form W-2 showing wages in USD
• Pay wages in compliant manner (some states have restrictions)

Example: Annual Salary

Scenario: Your employer pays you an annual salary of $100,000, paid monthly in Bitcoin.

January payment:

• Gross salary: $8,333.33
• BTC price: $45,000
• BTC received: 0.185 BTC
• Taxable income: $8,333.33 (shown on W-2)
• Cost basis: $8,333.33 (for the 0.185 BTC)

Payment for Goods/Services in Crypto

Receiving Crypto as Payment

If you sell goods or services and receive cryptocurrency:

• Income = FMV of crypto at receipt
• Business income if you're a business
• Self-employment income if you're self-employed
• Report on Schedule C (or business return)

Example: Freelance Design Work

You complete a logo design and invoice $2,000. The client pays 0.5 ETH when ETH = $4,000.

• Amount received: 0.5 ETH
• FMV: 0.5 × $4,000 = $2,000
• Business income: $2,000 (Schedule C)
• Self-employment tax: 15.3% × $2,000 = $306
• Income tax: Taxed at marginal rate
• Cost basis: $2,000 (for future sale)

Referral Bonuses and Promotional Rewards

Exchange Referral Programs

Many exchanges offer crypto rewards for referring new users:

• Coinbase: Earn crypto for referrals
• Binance.US: Referral commission rewards
• Kraken: Referral bonuses

Tax Treatment

• Ordinary income when received
• FMV at receipt = taxable amount
• Report on Schedule 1, Line 8z as "Other Income"
• Cost basis = income value

Sign-Up Bonuses

Some exchanges give new users crypto bonuses:

• Example: Webull giving $10 in crypto for signing up
• Tax treatment: Ordinary income
• Amount: FMV when bonus is credited

Trading Competition Prizes

Crypto exchanges often run trading competitions with prize pools:

• Prizes are ordinary income
• Report as "Other Income"
• FMV at receipt time

Learn-to-Earn Programs

Coinbase Earn

Coinbase Earn pays users to watch educational videos and complete quizzes:

• Typical rewards: $3-$10 per lesson in various tokens
• Tax treatment: Ordinary income
• Receipt date: When tokens are deposited to your account
• FMV: Market price at deposit time

Other Learn-to-Earn Platforms

• Binance Learn & Earn: Similar to Coinbase Earn
• Phemex Learn to Earn: Quiz rewards
• CMC Earn (CoinMarketCap): Educational rewards

Example: Coinbase Earn

You complete 5 Coinbase Earn lessons in 2025:

Report $25 as ordinary income on Schedule 1, Line 8z.

Play-to-Earn Gaming

What is Play-to-Earn?

Play-to-earn (P2E) games reward players with cryptocurrency or NFTs:

• Axie Infinity: Earn SLP (Smooth Love Potion) and AXS tokens
• Decentraland: Earn MANA
• The Sandbox: Earn SAND
• Gods Unchained: Earn GODS tokens and tradable NFT cards
• Splinterlands: Earn DEC tokens and cards

Tax Treatment

Casual Players

If you play games casually for fun:

• Income when rewards are claimed/withdrawn
• FMV at claim time = taxable income
• Report as "Other Income" (Schedule 1, Line 8z)
• NOT self-employment income (no SE tax)

Professional Players

If you play games as a business or trade:

• Business income (Schedule C)
• Subject to self-employment tax
• Can deduct business expenses (equipment, game assets, etc.)
• May need quarterly estimated taxes

Example: Axie Infinity

Scenario: You play Axie Infinity and earn 500 SLP tokens per week. You claim and sell weekly.

• Week 1: Claim 500 SLP when SLP = $0.02 → Income = $10
• Week 2: Claim 500 SLP when SLP = $0.018 → Income = $9
• Annual total: 52 weeks × ~$9.50 average = $494 income

Casual player: Report $494 on Schedule 1, Line 8z

Professional player: Report on Schedule C, pay SE tax

How to Report Crypto Income on Tax Forms

Form W-2 (Employee Wages)

If you receive crypto as an employee:

• Your employer reports on Form W-2
• USD value included in Box 1 (Wages)
• Taxes withheld in Box 2 (Federal withholding)
• You report on Form 1040, Line 1

Schedule C (Self-Employment)

If you receive crypto as a freelancer or business:

1. Complete Schedule C (Profit or Loss from Business)
2. Report gross income from crypto payments
3. Deduct allowable business expenses
4. Net income flows to Form 1040, Line 3
5. Complete Schedule SE (Self-Employment Tax)
6. SE tax flows to Form 1040, Schedule 2, Line 4

Schedule 1, Line 8z (Other Income)

For airdrops, referral bonuses, learn-to-earn, casual play-to-earn, and other miscellaneous crypto income:

1. Calculate total USD value of all qualifying income
2. Report on Schedule 1, Line 8z
3. Write description: "Cryptocurrency Income" or be specific ("Airdrops," "Coinbase Earn," etc.)
4. Amount flows to Form 1040, Line 8

Cost Basis After Receiving Income

When you receive cryptocurrency as income, your cost basis equals the fair market value at receipt. This prevents double taxation.

Example: Complete Cycle

Step 1: Receive Income

• March 1: Freelance payment of 1 ETH when ETH = $3,000
• Income: $3,000 (taxed as ordinary income)
• Cost basis: $3,000

Step 2: Sell Later

• June 1: Sell 1 ETH when ETH = $3,500
• Proceeds: $3,500
• Cost basis: $3,000
• Capital gain: $3,500 - $3,000 = $500
• Holding period: 3 months = short-term
• Tax: $500 taxed at ordinary income rates

Total taxes paid:

• Income tax on $3,000 (when received)
• Capital gains tax on $500 (when sold)

Example Scenarios with Calculations

Scenario 1: Crypto Salary (Employee)

You work for a crypto company that pays 50% of your $120,000 salary in Bitcoin.

• Annual salary: $120,000 ($60,000 cash + $60,000 BTC)
• BTC portion: Received monthly, ~$5,000/month worth
• Tax treatment: All $120,000 reported on W-2 as ordinary wages
• Withholding: Employer withholds tax from cash portion
• Cost basis: Each BTC payment has cost basis = USD value when received

Scenario 2: Freelance Web Developer

You're a self-employed web developer who earned $80,000 in crypto payments in 2025.

• Gross income: $80,000
• Business expenses: -$15,000 (computer, software, home office, etc.)
• Net profit: $65,000
• Report on Schedule C
• Self-employment tax: $65,000 × 92.35% × 15.3% = ~$9,180
• Income tax: On $65,000 minus half of SE tax (~$60,410)

Scenario 3: Mixed Income

You have multiple sources of crypto income in 2025:

Record Keeping Requirements

What to Track

The IRS requires detailed records for all crypto income:

• Date and time of receipt
• Type of income (salary, payment, airdrop, etc.)
• Amount received (in crypto)
• Fair market value in USD at receipt
• Source (employer, client, protocol, etc.)
• Wallet/exchange where received
• Purpose (for business income)

Documentation to Keep

• Invoices for freelance/business payments
• Contracts or employment agreements
• Transaction records from exchanges/wallets
• Screenshots of airdrop claims, learn-to-earn completions
• Price data from the date of receipt
• Form 1099-MISC or 1099-NEC if issued by payers

Retention Period

Keep records for at least 3 years after filing (IRS audit period), or:

• 6 years: If you underreport income by more than 25%
• 7 years: For business expense deductions
• Indefinitely: If fraud or no return filed

Tracking Tools

• Crypto tax software: Koinly, CoinTracker, TokenTax
• Spreadsheets: Manual tracking for simple situations
• Accounting software: QuickBooks, FreshBooks (for business income)

Common Mistakes to Avoid

1. Not reporting crypto income: All crypto income is taxable and must be reported
2. Reporting only when sold: Income tax applies when received, not when sold
3. Using wrong FMV: Use the price at time of receipt, not purchase or year-end
4. Forgetting cost basis: Cost basis = income value (prevents double tax on sale)
5. Not tracking small amounts: Even $1 in crypto is technically taxable
6. Ignoring airdrops: Most airdrops are taxable when you have control
7. Wrong form for self-employment: Use Schedule C, not Schedule 1, for business income
8. Not paying self-employment tax: SE income requires 15.3% SE tax in addition to income tax
9. Missing quarterly estimates: Self-employed must pay quarterly or face penalties
10. Claiming employees as contractors: Employers must issue W-2s, not 1099s, for employees

FAQs

Is all crypto income taxable?

Yes. The IRS treats cryptocurrency as property, and any crypto received as income is taxable at fair market value when received.

Do I report crypto income even if I didn't sell it?

Yes. Crypto income is taxable when received, regardless of whether you sell it. Selling creates a separate capital gains tax event.

Are airdrops always taxable?

Most airdrops are taxable when you gain "dominion and control" - meaning you can sell, trade, or transfer the tokens. Locked or non-transferable airdrops may not be immediately taxable.

Do I owe self-employment tax on all crypto income?

No. Only self-employment income (freelancing, business) is subject to SE tax (15.3%). Employment income (W-2) and passive income (airdrops, learn-to-earn) are not subject to SE tax.

What if I receive crypto worth less than $600?

You still must report it. The $600 threshold is only for when payers must issue Form 1099, not for your reporting obligation. All income is taxable.

Can I deduct crypto I received as income if it loses value?

No. Once you report crypto as income, you can't deduct its value dropping. However, if you sell it at a loss, you can claim a capital loss.

How do I report hard fork coins?

Per Revenue Ruling 2019-24, hard fork coins are ordinary income when you receive them (gain dominion and control). Report on Schedule 1, Line 8z.

What about play-to-earn NFTs?

NFTs earned in games are ordinary income at FMV when received. If you later sell the NFT, any gain or loss is a capital gains event.

Do I need to report Coinbase Earn if it's only $20?

Technically yes. All income is taxable. However, the IRS is unlikely to pursue small amounts. Use crypto tax software to track everything automatically.

Can my employer just pay me in crypto without withholding taxes?

No. Employers must withhold income tax and FICA taxes from employee wages, regardless of payment method. The employer must calculate the USD value and withhold accordingly.

Tools & Resources

Crypto Tax Software

• Koinly - Best overall for tracking all income types
• CoinTracker - Great for exchange-based income
• TokenTax - Excellent for complex DeFi and NFT income
• CryptoTaxCalculator - Good for play-to-earn tracking
• ZenLedger - Affordable option with good features

IRS Resources

• Schedule C Instructions
• Schedule 1 Instructions
• Revenue Ruling 2019-24 (Forks & Airdrops)
• Revenue Ruling 2023-14 (Staking)
• IRS Crypto FAQs

Final Thoughts

Cryptocurrency income is taxable when received at fair market value, just like traditional income. The complexity comes from tracking numerous small transactions (airdrops, learn-to-earn) and determining whether income is employment, self-employment, or other income.

Key principles:

• Receive = income tax at FMV
• Sell later = capital gains tax on appreciation
• Cost basis = income value (no double tax)
• Self-employment = additional SE tax

For most taxpayers with simple crypto income (airdrops, learn-to-earn, occasional payments), crypto tax software like Koinly makes compliance straightforward. Self-employed individuals earning significant crypto income should consider working with a crypto-specialized CPA to optimize deductions and ensure proper reporting.