Cryptocurrency as Property: Practical Tax Implications Under IRS Guidance
If you have engaged with cryptocurrency in any meaningful way, whether as an investor, trader, or miner, this discussion is for you.
For federal tax purposes, cryptocurrency is treated as property, not currency, under IRS Notice 2014-21. That classification governs how gains, losses, and income are reported. At the same time, the IRS applies certain securities-style mechanics, particularly around basis tracking and gain recognition, to assets it still classifies as property. This hybrid approach often creates confusion. The result is a set of technical issues around documentation, timing, and classification. These issues are not theoretical. They are areas where the IRS has already taken positions and where assumptions frequently break down.
The IRS’s starting point is straightforward. Cryptocurrency is property, and general tax principles applicable to property transactions apply. Where problems arise is in how taxpayers interact with cryptocurrency in practice. Cryptocurrency is frequently used like a currency for payments, transfers, and swaps. It is also commonly treated like stock for trading or portfolio diversification. Applying currency-based or stock-based assumptions to an asset classified as property is one of the most common sources of cryptocurrency tax error.
Stock-style basis mechanics applied to cryptocurrency
Although cryptocurrency is not a stock or security, the IRS permits taxpayers to determine gain or loss using FIFO or specific identification. Specific identification is allowed only if the taxpayer can adequately identify the units sold. Adequate identification requires unit-level records showing the date and time of acquisition, the cost basis, the date and time of disposition, and the fair market value at disposition. When units cannot be adequately identified, FIFO applies by default. If basis cannot be substantiated at all, the IRS may assert zero basis.
Unlike brokerage accounts, cryptocurrency infrastructure does not reliably preserve lot-level continuity. Transfers between wallets and exchanges can often break the basis chain. When that happens, taxpayers lose control over basis selection. This is one of the most common reasons cryptocurrency gains can be overstated.
Loss strategies and wash sale assumptions
Another tricky area for cryptocurrency lies in section 1091, the wash sale statute. Technically, section 1091 only applies to stocks and securities. The IRS has not issued regulations expressly extending wash sale rules to cryptocurrency. That said, the absence of a cryptocurrency-specific wash sale rule does not mean loss strategies are risk free. The IRS has authority to challenge transactions under the economic substance doctrine, step transaction principles, and general anti-abuse doctrines. Loss strategies that involve systematic repurchases of economically identical positions, particularly when executed solely to generate tax losses, may be scrutinized even if the asset itself is not classified as a security. Additionally, Congress has repeatedly proposed extending wash sale treatment to cryptocurrency, signaling continued regulatory attention in this area.
Forks and airdrops depend on dominion and control
Under Revenue Ruling 2019-24, income arising from hard forks and airdrops involving cryptocurrency is recognized when the taxpayer has dominion and control over the new units. This is a timing issue rather than a valuation issue. Dominion and control depend on the facts. Relevant considerations include wallet or exchange access, whether the asset can be transferred or sold, and whether affirmative action is required by the taxpayer. As a result, income from cryptocurrency forks and airdrops is frequently reported in the wrong tax year or not reported at all. Software alone often cannot determine the correct timing without a factual review.
Section 165 losses and the IRS’s narrow view
The IRS has generally taken the position that Section 165 loss treatment does not apply to most cryptocurrency losses. Declines in value are not deductible. Personal casualty or theft losses involving cryptocurrency are largely disallowed post-TCJA. Abandonment and worthlessness arguments are closely scrutinized and rarely succeed without strong factual support. Many taxpayers assume that a loss in value automatically produces a deductible loss. The IRS does not share that view.
Section 1031 does not apply to cryptocurrency
The IRS has consistently rejected attempts to apply Section 1031 like-kind exchange treatment to cryptocurrency transactions. After the Tax Cuts and Jobs Act, Section 1031 applies only to real property. The IRS’s position is that cryptocurrency-to-cryptocurrency exchanges do not qualify and that retroactive claims are generally unsupported outside of very narrow legacy arguments. Cryptocurrency exchanges are taxable events.
Cryptocurrency tax issues rarely arise from a single transaction. They develop over time as assumptions compound across wallets, platforms, and tax years.
For taxpayers active in cryptocurrency, the real question is not whether cryptocurrency is taxable. It is how classification, substantiation, and timing are handled under existing IRS guidance.
That is where thoughtful tax counsel adds value. Book a consultation at RazaaTaxLaw.com today.