Crypto Rewards

[lyakobson]

I am confused as to how the following should be reported:  I received $8.78 in free crypto in 2024, all of which was sold.  I received a 1099-MISC for the $8.78 income.  On my 1099-B, the free crypto is included in my cost basis and sales proceeds.  I am currently reporting the 1099-MISC as well as the 1099-B without changes.  Is this correct?  My thinking is I received the free crypto and thus would report it as income on the 1099-MISC.  Anything I did with it later, such as using it in a transaction would be a completely separate transaction.  Do any adjustments have to be made?  Also, is $8.78 considered immaterial by the IRS?

Thank you.

[DianeW777]

Yes, that is correct.  The $8.78 reported as income allows you to use that as your cost basis for the crypto sale. Using it later would be considered a separate transaction. 

As indicated taxable income from your 'free' crypto does get used as your cost basis when the crypto is sold. This is the significance for you which reduces gain. If you had a larger transaction it would be very important to include all cost basis for a sale. This reduces gain or increases loss depending on the transactions.

[lyakobson]

So do adjustments need to be made or not?  I don't understand how it would reduce my gain?  Regardless of the reward amount, the amount I bought for and sold is unaffected.  Let's say 50 crypto @ $1 was sold for $2.  I made $50.  Now lets says 1 of those 50 cryptos is a reward and the amount I actually purchased was 49 crypto, giving my actual purchase amount a $49 gain.  How does the reward affect this?  If the reward never happened, my gain would still be $49.  Anyway, is it correct to report the crypto as income on 1099-MISC AND any gain/loss on the reward?

Thank you.

[JamesG1]

It is correct to report the crypto as income on the IRS form 1099-MISC.  This is one transaction.

It is correct to report any gain or loss on the sale of the reward.  The sale of the one unit which was acquired as a reward is a second transaction.  The cost basis of the one unit is determined by the income that was reported on the IRS form 1099-MISC.

IRS Publication 551 Basis of Assets, page 10, states:

The amount you include in income becomes your basis.

You said:  So do adjustments need to be made or not?  

The only adjustment that I would recommend would be to round the $8.78 in reward income to $9.00

You said:  I don't understand how it would reduce my gain? 

As @DianeW777 explains so well, at the time of sale, the $9.00 cost basis offsets the sales proceeds and reduces your taxable income on the sales transaction.

In your example, the one unit that was acquired by reward would report reward income of $.49 and the cost basis of the one unit would be $.49.

If the one unit were sold for $2.00, the gain on the sale of the one unit would be $1.51.

@lyakobson