This may be an unusual situation because I don’t think I understand the full financial relationship between you and the credit card bank and the cryptocurrency transactions. Let me tell you two general principles and make a suggestion on how I think this could be handled.
1. Credit card rewards and cashback bonuses are considered taxable income if it is the start up bonus, for example, use your card five times the first month and get $500. After that, your monthly cashback reward is not taxable income because it is treated as a discount of the merchant fee that your credit card bank charges to the merchant. Discounts and fee rebates are not taxable income.
2. If you mine cryptocurrency, you are considered to have income equal to the US$ value of the cryptocurrency on the day it is credited to your account. If you buy or sell or trade cryptocurrency, it is only taxable when you translate it into a different cryptocurrency or into US$ based on the exchange rate for that day. You generally have to pay tax on any increase in value and you cannot deduct loss in value (although some exceptions apply).
So my thinking is that the cash back rewards should not be included in your taxable income. However, that would mean that your cost basis in those rewards is zero. For example, suppose you receive $10 equivalent of some cryptocurrency as your reward. Next month or next year, you convert it to a different currency when the value is $12. Because you have no taxable basis in the cryptocurrency, the entire $12 is taxable income.
On the other hand, if you accept the status quo and pay tax on the rewards, then you have a taxable basis. Suppose you receive $10 in cryptocurrency rewards, and then next month or next year you convert it at a value of $12. Because you have a $10 basis, you only have a $2 taxable gain.
I agree that if you report different income on your tax return that does not match your 1099‘s, the IRS will probably send an inquiring letter. You would have to respond with an explanation of the situation and a promise to pay tax on the full value of the cryptocurrency when and if you sell or convert it. Or, you can maintain the status quo and pay tax on the rewards now, and keep track of your basis so that when you convert the rewards later, you only pay tax on any additional gain over the basis. I have no idea how you would track the basis of fractional cryptocurrency in your account, hopefully there is some software to take care of for you.
Hope that offers some clarification.
