Cryptocurrency Tax Rules for Small Businesses

Crypto tax rules for businesses:

Accepting crypto as payment:

• Income is recognized at the fair market value (FMV) of the crypto on the date received
• Report as ordinary business income on Schedule C or Form 1120-S
• The FMV becomes your cost basis in the crypto
• When you later sell or convert the crypto, the difference between sale price and basis is a capital gain or loss

Paying contractors in crypto:

• The FMV of the crypto on the payment date is the payment amount
• You must issue a 1099-NEC for $600+ in annual payments (using the USD value)
• The contractor reports the FMV as income
• Your business deducts the FMV as a business expense
• If the crypto appreciated since you acquired it, you also recognize a capital gain on the disposition

Paying employees in crypto:

• Must withhold income tax, Social Security, and Medicare on the FMV
• Report on W-2 like any other wage payment
• Payroll taxes are calculated on the USD FMV

Mining crypto:

• Mining income is recognized at the FMV of the crypto on the date mined
• Reported as self-employment income (subject to SE tax) if mining is a trade or business
• Mining expenses (equipment, electricity, internet) are deductible business expenses
• Mining equipment depreciates over 5 years (bonus depreciation eligible)

Staking rewards:

• Per Revenue Ruling 2023-14, staking rewards are taxable as income when received
• FMV at receipt is the amount of income
• Subject to SE tax if staking is a trade or business

Capital gains on selling crypto:

• Short-term (held 1 year or less): taxed as ordinary income
• Long-term (held more than 1 year): taxed at 0%, 15%, or 20%
• Specific identification method is allowed (sell highest-cost lots first)
• FIFO is the default if no specific identification is made
• Wash sale rules currently don’t apply to crypto (but proposed legislation may change this)

Record-keeping requirements:

• Date of acquisition and cost basis (FMV at acquisition)
• Date and price of every sale or disposition
• Transaction ID or hash for verification