What Is Reward Income?
When you earn crypto through staking, airdrops, or other incentives, the IRS generally views this as ordinary income. The key factor is the timing: you owe tax when you actually receive the tokens, not when they increase in value later. If an airdrop arrives and the tokens are worth $200 at receipt, that amount is taxable as ordinary income. Similarly, staking rewards are taxable when credited, based on their fair market value at that moment.
How Rewards Are Taxed
Rewards earned from staking or airdrops are considered ordinary income at their fair market value when credited. You must report this as income in the year received, regardless of whether you sell immediately or hold. If you hold for later sale, any subsequent gain or loss is treated as a capital gain or loss, depending on how long you hold after receipt.
Tax Treatment of Airdrops and Rewards
The IRS treats airdropped tokens as income at the moment they are credited to your wallet, if they are usable and have value. Rewards from staking or liquidity mining are also income at receipt. The challenge is timing: income is recognized when earned, not when sold, and subsequent gains are capital gains. If the IRS clarifies, it would specify whether unreleased or unclaimed rewards are taxable before receipt—currently, most consider it upon credit.
Income Timing
You owe ordinary income when the tokens are credited, based on their FMV at that moment. Holding onto the tokens does not delay the income recognition.
Holding and Selling
Holding the tokens after receipt means any increase in their value is a capital gain. If you sell, the profit is either short-term (held less than a year) or long-term (held more than a year).
Common Mistakes in Reporting Rewards
❌ Not reporting rewards as income
Why
Many users think only gains from sale are taxable, not the receipt of tokens.
Fix
Track the date and FMV of each reward. Report as ordinary income in that year.
⚠️ Cost
Potential IRS penalties and underpayment taxes.
❌ Holding rewards and delaying sale to reduce gains
Why
Some think they can defer income by waiting. But the IRS taxes upon receipt.
Fix
Report income when credited, regardless of sale timing.
⚠️ Cost
❌ Mixing income and gains without tracking basis
Why
Confusing reward income with subsequent sale gains leads to incorrect tax treatment.
Fix
Keep detailed records of receipt FMV and sale prices.
⚠️ Cost
How Moonscape Handles Reward Tax Events
Moonscape automatically detects when rewards are credited to your wallet and marks these as taxable income events. It captures the FMV at the moment of receipt, ensuring you report accurate income. When you later sell the tokens, Moonscape calculates capital gains based on the original basis and sale price. This prevents missed income and ensures compliance across multiple chains and platforms.