How should you report the Crypto payout and burns from staking or participating to earn rewards? Should payout be reported as ordinary income and burn as capital loss?

[fargo121]

The Crypto is used to pay reward as part of a data science competition. You will have to stake crypto to participate. When performing well, you will be rewarded with new crypto; if not performing well, you staked crypto will be burned (lose permanently). In this case, should you always report payout as ordinary income based om FMV of the crypto and then report burns as capital loss? How would you report payout and burns in Turbo tax? Should you treat the burn as a sales event for the crypto with proceed as $0 and cost basis from when you purchased them (or FMV for the payout, if earned payout got burned later)?

[DawnC]

When a reward is received from staking delegation, the tax treatment depends on the type of reward. If the reward is for:

• Additional tokens, it's taxed as ordinary income - see this TurboTax FAQ to enter
• An increase in the value of tokens already held, it's taxed as a capital gain - see this TurboTax FAQ to enter

Burns that have now become worthless are reported as capital gain/loss with Proceeds = $0 and the basis being what you originally paid for it.   Make sure you have Proof of Burn in case of inquiry.   

[fargo121]

Thanks @DawnC ! Wouldn't the reward always be in the form of additional tokens? Can you give an example of rewards in the form of increased of value? 

Burn makes sense and if you burned crypto previously rewarded (and payout and burn can happen on the same day), do you still have to report payout and burn separately or should you report the net amount on the tax return?

For example, if you earned payout for 500 tokens, and burned 900 in total for the year, Do you

1. just report the capital loss of the net 400 (based on how much you brought it) or

2. you need to report ordinary income for these 500 at FMV when earned, then report a capital loss (likely short term) for the same 500 earned during the year (amount will be equal to the ordinary income reported for them) + a loss of 400 (based on how much you brought it initially). 

I'm not sure as the payout and burn seems like similar types of transaction in this case and could happen during the same day but we are treating them very differently.  Thanks again for the help. 

[fargo121]

Bumping this up - appreciate anyone to share your thoughts and suggestions. Thanks. 

[RobertB4444]

You should enter each transaction separately.  The IRS is questioning all of this cryptocurrency stuff a lot.  Don't give them anything to ask questions about.

@fargo121