How to determine Fair Market Value for cryptocurrency mining with no established market?

This is a great question about a complicated topic. When cryptocurrency has no established market value, the IRS still expects you to report it at "fair market value" - but determining that can be tricky. For your first question: A single private transaction with an acquaintance typically doesn't establish fair market value in the traditional sense. FMV generally requires an open market with multiple buyers and sellers. However, in the absence of any other valuation method, the IRS might consider this transaction as evidence of value, particularly if it was conducted at arm's length (meaning you weren't giving your friend a special deal). For your second question: When you mine cryptocurrency, you need to recognize ordinary income based on the FMV at the time of receipt. Since there was no market when you mined, a reasonable approach would be to use your mining costs as the value. Then, when you sold to your friend, you'd calculate gain/loss from that basis. For the tokens you held until a market developed, your cost basis would still be the FMV when mined (likely your mining costs), and you'd calculate gain/loss when you eventually sold them on the market that developed later. I'd recommend documenting your reasoning and methodology thoroughly in case of questions later.

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I just wanted to update everyone - I tried taxr.ai after seeing it mentioned here and it actually solved my similar crypto valuation problem. I was skeptical at first since most crypto tax tools don't handle edge cases well, but they had specific options for "pre-market mining rewards" that applied to my situation perfectly. They helped establish a reasonable cost basis using my electricity costs and hardware depreciation, then tracked the eventual market development to calculate the correct capital gains. Saved me so much headache and probably thousands in potentially incorrect tax calculations.

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Hey, tax accountant here. I've handled several cases like this for clients. Here's what you need to know: For cryptocurrency with no established market at the time of mining, the IRS hasn't provided explicit guidance on valuation. However, there are some accepted approaches: 1. Cost of production method - Using your electricity costs, equipment depreciation, etc. to establish a basis 2. First market value - Using the price when the token first hits an exchange (discounted for time) 3. Comparable asset - Using a similar cryptocurrency's valuation metrics For your specific situation, I'd recommend using your mining costs to establish the initial ordinary income value. For the single transaction with your friend, treat that as a separate capital gain/loss event with your mining cost as the basis. Document everything extensively - your mining costs, timestamps, the transaction with your friend, and when the market eventually developed. In case of an audit, showing a consistent, reasonable methodology is key.

Wait, I'm confused about something basic here. Does the IRS even know about crypto you mine if there's no market for it? Like, if nobody reported anything anywhere, how would they even know you had it?