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Scenario: I have 100 of altcoins on Bl0ckFi. Every month, Bl0ckFi credits 1 additional altcoin in the form of interest. After a year I have 112 altcoins. Then the tax season comes. I pay dollars to IRS because I earned those 12 altcoins. Let’s say I paid $5 to IRS.

Then surprise surprise, this altcoin goes to ZERO (and 99% of them probably will). Then, I can write off the original 100 altcoins I purchased as capital loss, however, I CANNOT write off the 12 altcoins as capital loss, since I did NOT purchase them. Instead, they were “earned” as interest. Will the IRS reimburse the $5 I paid them?

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    Are you certain that you can;t claim a capital loss? What IRS rules are you basing that on? I would think you could claim the drop in altcoin value as a capital loss, which means you can get some of the $5 back, but not all of it.
    – D Stanley
    Oct 12, 2021 at 14:39
  • Capital loss applies to an asset that was acquired with a base price. I did NOT acquire this asset. It was earned in the form of an interest payment, similar to an interest rate one earns in a savings account. This is “INCOME”. But I’m not sure.
    – user112349
    Oct 12, 2021 at 14:41
  • @DStanley “drop in altcoin value”. Drop from what price? From the market price on the date it was granted?
    – user112349
    Oct 12, 2021 at 14:43
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    You were given altcoin in lieu of cash interest, so in a sense you did acquire it. It's the same end result if you were given cash and immediately bought altcoin. Again I'm no expert on crypto and tax but I'm thinking of analogies like stock compensation (you're given stock instead of cash salary) and other similar processes. The "loss" on your altcoin would be the drop in the equivalent cash value from the time you were given it to the time you sell it.
    – D Stanley
    Oct 12, 2021 at 15:07
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    "Acquire" doesn't mean "bought"; it's just a word with Latin roots that means the same thing as "get" (a word with Germanic roots).
    – chepner
    Nov 29, 2021 at 14:28

1 Answer 1

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  1. Your interest income should be calculated in dollar value at the moment each interest payment is received. Declare that income on your taxes. "Regarding the nature of crypto interest, you need to report it on your income tax return as interest or ordinary income." - article
  2. Once received, the crypto interest becomes a capital asset. Your basis and your unrealized or realized gains or losses are calculated the same as with any other capital asset.
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  • To be exact, if&when the asset becomes worthless you realize a loss on both the purchased-for-fiat and received-as-interest coins. After netting any other realized gains and losses, you can deduct net loss up to $3k per year (half if MFS), with any excess carried forward and usable in future years (unless you die first). That reduces your tax at this year's marginal rate, which is not necessarily the same rate as the year in which you received the interest and paid tax on it.
    – dave_thompson_085
    Dec 1, 2021 at 5:16

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