IRS Virtual Currency FAQ Explained – Plain English Guide

The IRS published a 46-question FAQ on crypto and most people have never read it. That's a problem, because it contains some answers that are genuinely surprising. I went through the whole thing and pulled out the parts that actually matter for most crypto holders.

What Is the IRS Virtual Currency FAQ?

The IRS published a dedicated FAQ on virtual currency transactions on irs.gov. It’s not legally binding like a Revenue Ruling, but it’s the closest thing most people have to an official plain-language explanation of what the IRS expects. Most tax professionals rely on it as a baseline. Most crypto holders have never read it. That’s a gap worth closing.

Key Questions and Answers

Q: Does the IRS consider crypto to be property?

IRS answer: Yes. Virtual currency is property, not currency. Property tax rules apply. Capital gains tax on disposals.

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

IRS answer: No. Holding alone is not a taxable event. Tax only kicks in when you sell, trade, or otherwise dispose of it.

Q: Is crypto-to-crypto trading taxable?

IRS answer: Yes. Swapping one cryptocurrency for another is a taxable disposal. You must calculate the fair market value of what you received and compare it to your cost basis in what you gave up. Every DEX swap counts.

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

IRS answer: Your basis is the fair market value on the date of receipt. That same value is ordinary income you must report. You’re paying income tax on receipt and capital gains on any future appreciation.

Q: Are hard fork tokens taxable?

IRS answer: Per Revenue Ruling 2019-24, you have ordinary income at fair market value when you first have dominion and control over forked tokens. The “when you have control” part matters – it’s not necessarily the fork date if your exchange didn’t credit immediately.

Q: What if I received crypto from an airdrop?

IRS answer: Ordinary income at fair market value on receipt. Revenue Ruling 2023-14 made explicit that this applies even if you didn’t take any action to receive the airdrop. It landed in your wallet – you have income.

Q: Can I deduct crypto losses?

IRS answer: Yes. Realized losses are capital losses – deductible against capital gains, then up to $3,000/year against ordinary income, with the remainder carried forward indefinitely.

Q: What records should I keep?

IRS answer: Enough to calculate your basis and gain or loss. Date acquired, amount, fair market value at acquisition, date sold, and proceeds. That’s the minimum.

The Form 1040 Crypto Question

Form 1040 asks every taxpayer: “At any time during [year], did you receive, sell, exchange, or otherwise dispose of any digital assets?” This is a yes/no question on the main form. Answer it honestly. Checking No when you had activity is a false statement on a federal return – a separate problem from any tax liability.

Where to Find the Full FAQ

The IRS Virtual Currency FAQ lives on irs.gov and gets updated as new guidance is issued. Watch for updates around DeFi, NFTs, stablecoins, and 1099-DA reporting – these are the areas where guidance is still evolving.

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