IRS Virtual Currency FAQ Explained – Plain English Guide

The IRS published an official FAQ on virtual currency that answers dozens of common questions about crypto taxes. Here are the most important answers in plain English.

What Is the IRS Virtual Currency FAQ?

The IRS maintains a dedicated Frequently Asked Questions on Virtual Currency Transactions page that provides official guidance on how the IRS views and taxes cryptocurrency. This FAQ is not legally binding like a Revenue Ruling, but it represents the IRS's current official position and is widely relied upon by tax professionals.

Key Questions and Answers

Q: Does the IRS consider crypto to be property?

IRS answer: Yes. Virtual currency is treated as property, not currency. General tax principles for property transactions apply. This means capital gains tax applies to disposals.

Q: If I buy crypto and hold it, do I have income?

IRS answer: No. Simply holding virtual currency is not a taxable event. You only realize income or gain when you sell, trade, or otherwise dispose of it.

Q: Is crypto-to-crypto trading taxable?

IRS answer: Yes. Exchanging one virtual currency for another is a taxable disposal. You must calculate the fair market value of the virtual currency received and compare it to your cost basis in the virtual currency given up.

Q: What is my basis in virtual currency received as payment for services?

IRS answer: Your basis equals the fair market value of the virtual currency at the date of receipt. The same value is ordinary income that must be reported.

Q: Are hard fork tokens taxable?

IRS answer: Per Revenue Ruling 2019-24, you have ordinary income when you receive new tokens from a hard fork, measured at fair market value when you first have dominion and control over the tokens.

Q: What if I received crypto from an airdrop?

IRS answer: Airdropped tokens are taxable ordinary income at fair market value when received (when you have dominion and control). Per Rev. Rul. 2023-14, this applies even if you did not affirmatively act to receive the airdrop.

Q: Can I deduct crypto losses?

IRS answer: Yes, realized losses on crypto are deductible as capital losses, subject to the capital loss limitation rules ($3,000 annual deduction against ordinary income, with excess carried forward).

Q: What records should I keep?

IRS answer: Keep records sufficient to calculate your basis and gain or loss, including the date acquired, amount acquired, the fair market value at the time of acquisition, date sold/traded, and proceeds received.

The 2024 Form 1040 Crypto Question

The IRS requires all taxpayers to answer the following question on Form 1040: "At any time during [year], did you receive, sell, exchange, or otherwise dispose of any digital assets (including cryptocurrency, NFTs, or other digital assets)?" You must answer this question honestly even if you had no taxable gains.

Where to Find the Full FAQ

The IRS Virtual Currency FAQ is available on irs.gov. The FAQ is updated periodically as new guidance is issued. Stay current with any updates, particularly around DeFi, NFTs, stablecoins, and the 1099-DA reporting requirements.

Disclaimer: This article is for general informational purposes only and does not constitute tax advice. For individual tax advice, consult a licensed tax professional.