IRS Notice 2014-21: The Ultimate Guide to Cryptocurrency Taxes

LEGAL DISCLAIMER: This article provides general, informational content for educational purposes only. It is not a substitute for professional legal advice from a qualified attorney or certified tax professional. Always consult with a qualified expert for guidance on your specific financial and legal situation.

Imagine you bought a rare, valuable painting for $100. For years, it hangs on your wall. You wouldn't use a corner of the canvas to buy a cup of coffee. It's an asset, a piece of property. If you later sell that painting for $10,000, you understand that you've made a profit, and you'd expect to owe tax on that $9,900 gain. In the early days of Bitcoin, many people wondered: is it like this painting, or is it like the cash in my wallet? In 2014, the internal_revenue_service (IRS) answered this question with a landmark piece of guidance: IRS Notice 2014-21. This document declared, in no uncertain terms, that for federal tax purposes, virtual currencies like Bitcoin are to be treated as property, not currency. This single decision is the bedrock of all U.S. crypto taxation. It means that every time you sell, trade, or use cryptocurrency to buy something, you are, in the eyes of the IRS, disposing of a piece of property—a potentially taxable event, just like selling a stock or that valuable painting. This guide will unpack every detail of this foundational notice and what it means for you.

• Key Takeaways At-a-Glance:
  • Crypto is Property: The core principle of IRS Notice 2014-21 is that virtual currencies are treated as property for tax purposes, meaning general property transaction rules apply. This is the most critical concept to understand about cryptocurrency_tax_law.
  • Every Transaction Can Be Taxable: Because it's property, IRS Notice 2014-21 clarifies that selling crypto for cash, trading one crypto for another (e.g., Bitcoin for Ethereum), or using it to buy goods or services are all taxable events that can trigger a capital_gains_tax.
  • Tracking is Your Responsibility: The notice places the burden of tracking on the taxpayer. You must know the `cost_basis` (what you paid) and the fair market value at the time of sale for every single transaction to accurately report your gains or losses.

To understand the “why” behind Notice 2014-21, we must go back to the early 2010s. Bitcoin, born from the 2008 financial crisis, was emerging from the niche corners of the internet into mainstream consciousness. Early adopters, miners, and investors were operating in a legal gray area. Was this new digital creation money? A commodity? A security? The tax implications were a complete mystery. The department_of_the_treasury and the IRS faced mounting pressure to provide clarity. Without official guidance, taxpayers were left to guess. Some treated it like foreign currency, others ignored it entirely. This “Wild West” environment was unsustainable for both the government, which was missing out on potential tax revenue, and for taxpayers, who faced uncertainty and risk. In response, the IRS issued Notice 2014-21 on March 25, 2014. It wasn't a new law passed by congress, but rather the agency's official interpretation of how existing tax law, primarily the internal_revenue_code, applies to this new technology. By classifying virtual currency as property, the IRS anchored its approach in decades of established legal precedent governing the taxation of assets like stocks, bonds, and real estate. This provided a framework, albeit a complex one, that brought cryptocurrency into the formal U.S. tax system for the first time.

It's crucial to understand what an IRS Notice is—and what it isn't. It's not a statute passed by Congress or a Treasury Regulation that has gone through a formal public comment period. Instead, a Notice is an official pronouncement from the IRS that provides guidance on a specific issue, often a new or evolving one. While it doesn't carry the same legal weight as a statute, it is considered “substantial authority.” This means taxpayers can rely on it to guide their actions and can use it as a defense against certain penalties if their interpretation of the law is ever challenged. Notice 2014-21 effectively told taxpayers, “This is how we, the IRS, are going to treat virtual currency transactions, and this is how we expect you to report them.” The document is structured as a series of 16 questions and answers, directly addressing the most common scenarios the IRS foresaw at the time.

The declaration of cryptocurrency as “property” has vastly different implications depending on how you interact with it. The core principle remains the same—you are dealing with an asset—but the tax consequences change with the context. Here is a breakdown of how Notice 2014-21 applies to common activities.

* Receiving as Wages | Income Event. | The fair market value of the crypto on the day you receive it is considered income. It is subject to federal income tax withholding and payroll taxes (Social Security, Medicare), just like a normal paycheck. |

The notice is structured as a Q&A, designed to be a practical guide. Let's dissect its most important pronouncements.

This is the cornerstone of the entire document. Q&A-1 asks, “How is virtual currency treated for federal tax purposes?” The answer is blunt: “For federal tax purposes, virtual currency is treated as property.” This means it is not treated as “currency” that could generate foreign currency gains and losses. Instead, it is a capital asset in the hands of most investors. This classification is the “domino” that causes all the other tax consequences to fall into place. It subjects crypto to the familiar rules of capital_gains_tax—a concept that applies to selling stocks, real estate, or collectibles. Relatable Example: You buy a share of stock for $200. That $200 is your cost basis. Two years later, you sell it for $500. You have a long-term capital gain of $300. The IRS views your Bitcoin purchase and sale in exactly the same way.

If crypto is property, the next logical question is how to calculate the profit or loss when you sell it. The notice explains that taxpayers must determine:

• The Basis: Your basis is typically what it cost you to acquire the asset, including any fees. This is your starting point.
• The Fair Market Value (FMV): When you sell or spend the crypto, you need to know its U.S. dollar value at that exact moment. The notice states that FMV is determined by converting the virtual currency into U.S. dollars “on a reasonable basis that is consistently applied.” Most people use the price quoted on the exchange where the transaction occurred.
• The Holding Period: The amount of tax you pay depends on how long you held the asset.
  • Short-Term Capital Gain: If you held the crypto for one year or less, your profit is taxed at your ordinary income tax rate, which can be much higher.
  • Long-Term Capital Gain: If you held the crypto for more than one year, your profit is taxed at lower long-term capital gains rates (0%, 15%, or 20% for most people).

For miners who use computing power to validate transactions and create new coins, the notice provides a clear rule. Q&A-8 states that when a taxpayer successfully “mines” virtual currency, the FMV of the currency as of the date of receipt is includible in gross income. Relatable Example: If you successfully mine one Ethereum on a day when its price is $3,000, you have just generated $3,000 of taxable income. You must report this on your tax return. Furthermore, if you are mining as a business (which most miners are), this income is likely subject to self_employment_tax. That $3,000 also becomes your cost basis for the Ethereum you just mined.

The notice clarifies that paying an employee with cryptocurrency doesn't avoid payroll obligations. The employer must report the U.S. dollar value of the crypto as wages on the employee's Form W-2. These wages are subject to federal income tax withholding, FICA (Social Security and Medicare), and FUTA (unemployment) taxes. Similarly, paying an independent contractor with crypto is a reportable event. The payer must issue a form_1099-misc or form_1099-nec if the value of the payment is $600 or more during the year. For the contractor, this is self-employment income, just as if they had been paid in cash.

• The Taxpayer: You. The individual investor, miner, or business owner. The IRS places the ultimate responsibility for accurate tracking and reporting on you.
• The Internal_Revenue_Service (IRS): The federal agency responsible for tax collection and enforcement. They issue guidance like Notice 2014-21 and have the authority to audit taxpayers who they suspect are non-compliant.
• Cryptocurrency Exchanges: Platforms like Coinbase, Kraken, and Binance. They are the marketplaces where most crypto is bought and sold. They are increasingly required to report user activity to the IRS, often via forms like the form_1099-b.
• Tax Professionals (CPAs & Tax Attorneys): Experts who can help you navigate the complexities of crypto tax law, ensure accurate reporting, and represent you in case of an irs_audit.

Navigating your crypto tax obligations can feel overwhelming, but it can be broken down into a logical process.

This is the most critical step. You cannot comply with Notice 2014-21 without excellent records. For every single transaction, you must record:

1. The date you acquired the crypto.
2. The cost basis (the purchase price in USD, including fees).
3. The date you sold, traded, or spent the crypto.
4. The fair market value (the sale price in USD) at the time of the transaction.
5. The purpose of the transaction (e.g., sold for USD, traded for ETH, bought a pizza).
6. Many people use specialized crypto tax software (like Koinly, CoinTracker, etc.) to automate this process by connecting to their exchange accounts.

Go through your transactions for the tax year. For each sale or disposal, determine if you held the asset for more than one year or for one year or less. This will determine which tax rate applies to any gains. This is your holding period.

For each transaction, subtract the cost basis from the sale proceeds to find your capital gain or loss. Sum up all your short-term gains and losses to get a net short-term figure. Do the same for your long-term gains and losses. You can use capital losses to offset capital gains, and potentially up to $3,000 of ordinary income per year.

The results of your calculations are reported to the IRS on specific forms, which are then attached to your main tax return (Form 1040).

1. form_8949 (Sales and Other Dispositions of Capital Assets): This is where you list every single crypto sale or trade individually.
2. schedule_d_(form_1040) (Capital Gains and Losses): This form summarizes the totals from Form 8949 to arrive at your net capital gain or loss for the year.

If you earned crypto from activities other than investing, you must report it as income.

1. Mining or Staking Rewards: Often reported on Schedule C as business income.
2. Getting Paid as an Employee: This should be included in the wages on your Form W-2.
3. Airdrops or Hard Forks: Subsequent IRS guidance (irs_revenue_ruling_2019-24) clarified these create income upon receipt if you have “dominion and control.”

• form_8949: Think of this as the detailed ledger of your crypto trades that you submit to the IRS. You must report the details of each sale here. Your crypto exchange may provide a summary document to help, but it's your responsibility to ensure its accuracy.
• schedule_d_(form_1040): This is the summary form. It takes the totals from all your Form 8949s (you might have one for short-term and one for long-term transactions) and calculates your final net capital gain or loss to be carried over to your main tax return.
• Exchange-Provided Documents (e.g., Form 1099-B, Transaction History): While not an official IRS form you file, the transaction history CSV file from your exchange is the raw data you will use to complete Form 8949. Some exchanges now issue a Form 1099-B, which directly reports proceeds to you and the IRS.

Notice 2014-21 was a foundational document, but the crypto world evolves at lightning speed. The IRS has since provided additional guidance and has significantly stepped up its enforcement efforts.

Five years after the initial notice, the crypto landscape had changed. New concepts like “hard forks” (where a blockchain splits, like the creation of Bitcoin Cash from Bitcoin) and “airdrops” (free distribution of tokens to wallet holders) were common. Taxpayers were confused. In response, the IRS issued irs_revenue_ruling_2019-24. This ruling clarified two key points:

1. Hard Forks: If a hard fork results in you receiving new cryptocurrency, you have taxable income equal to the fair market value of the new coins at the time you receive them (assuming you have the ability to transfer or sell them).
2. Airdrops: Similar to a hard fork, airdropped tokens create ordinary income upon receipt.

This ruling demonstrated that the IRS was continuing to apply the core “property” concept from Notice 2014-21 to new technological developments.

To show it was serious about compliance, the IRS began using a powerful legal tool called a “John Doe summons.” This allows the IRS to demand information from a third party (like a crypto exchange) about an entire class of unidentified taxpayers. The IRS successfully used this tool against major U.S. exchanges, including Coinbase and Kraken, forcing them to turn over the records of thousands of users who had transacted above certain thresholds. The message was clear: transacting on a major exchange is not anonymous, and the IRS is actively seeking out non-compliant taxpayers.

Starting with the 2019 tax year, the IRS added a question directly to the front page of Form 1040: “At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This is a strategic move. By forcing every single U.S. taxpayer to check “Yes” or “No,” the IRS makes it impossible to claim ignorance. Answering “No” untruthfully is to commit perjury on a federal tax filing, a serious offense. This question significantly raises the stakes for anyone choosing to ignore their crypto reporting obligations.

The principles of Notice 2014-21 are being stretched to their limits by the latest innovations in the crypto space. Current areas of uncertainty and debate include:

• Decentralized Finance (DeFi): How do you tax transactions like liquidity pool provision, yield farming, or decentralized lending, where there is no central intermediary and the nature of the “transaction” is highly complex?
• Non-Fungible Tokens (NFTs): While the sale of an NFT for a profit is clearly a taxable event under the 2014-21 framework, what about creating (minting) one? Is it a taxable event? And are NFTs treated as “collectibles,” which have a higher long-term capital gains tax rate?
• Staking Rewards: When you stake your crypto to help secure a network, you earn rewards. Is that income when the rewards are earned, or only when you sell them? The IRS has provided some guidance, but ambiguity remains.

The future of U.S. crypto taxation points towards more regulation and more reporting, not less. The infrastructure_investment_and_jobs_act, signed into law in 2021, contains significant provisions that will dramatically change the landscape. Starting in the coming years (the exact date has been subject to delay), the definition of a “broker” will be expanded to include cryptocurrency exchanges. This will require them to issue Form 1099-B to all their customers, reporting crypto sales transactions directly to the IRS. This will effectively end the era of self-reporting for most exchange-based transactions and bring crypto tax reporting in line with the traditional stock market. This change represents the most significant evolution in crypto tax law since Notice 2014-21 itself.

• airdrops: The distribution of a cryptocurrency token, usually for free, to numerous wallet addresses.
• capital_asset: Essentially any property you own, except for certain business-related assets.
• capital_gains_tax: A tax on the profit realized on the sale of a non-inventory asset.
• cost_basis: The original value of an asset for tax purposes, usually the purchase price.
• cryptocurrency_tax_law: The body of law and IRS guidance governing the taxation of digital assets.
• fair_market_value: The price an asset would sell for on the open market.
• form_8949: The tax form used to report the details of capital asset sales and dispositions.
• hard_fork: A radical change to a network's protocol that makes previously invalid blocks/transactions valid.
• holding_period: The length of time an investor holds an asset.
• internal_revenue_service: The U.S. government agency responsible for collecting taxes and enforcing tax law.
• john_doe_summons: An IRS tool to get information from a third party about a group of unnamed taxpayers.
• property: In the context of 2014-21, an asset that is subject to capital gains and losses upon sale.
• schedule_d_(form_1040): The tax form used to summarize capital gains and losses from Form 8949.
• self_employment_income: Income that derives from a person working for themselves, subject to self-employment tax.

• `capital_gains_tax`
• `cost_basis`
• `form_8949`
• `internal_revenue_service`
• `irs_revenue_ruling_2019-24`
• `self_employment_tax`
• `tax_evasion`