Is Cryptocurrency Received for Services Performed Taxable?

Arin V., EA , MBA

Arin is an Enrolled Agent (EA), authorized to represent taxpayers in front of the IRS, and holds a BA and MBA (Management) degree from California State University, Northridge.

Since the Internal Revenue Service (IRS) released updated guidance on the taxation of cryptocurrency in 2019, U.S. taxpayers have felt some trepidation about what might come next. In particular, with the advent of crowdsourcing platforms and additional payment methods and technologies, it is more important than ever to understand the implication of receiving cryptocurrency payments.

In a recently-released memorandum, the IRS discusses the treatment of receiving cryptocurrency as a payment for services rendered through crowdsourcing platforms.

As you may imagine, the IRS has decided that if you perform a service, a task, or a microtask on a crowdsourcing platform, and receive cryptocurrency in exchange for the services you performed, the cryptocurrency you receive is taxable as ordinary income on your U.S. tax return.

According to Section 61(a)(1) of the Internal Revenue Code, gross income means all income from whatever source derived, including compensation for services. Therefore, this would include compensation received for services performed on a crowdsourcing platform. 

But, you may ask, doesn’t the IRS consider cryptocurrency as property? It does, but, according to Section 83(a) of the Internal Revenue Code, if a taxpayer receives property for the performance of services, the excess of the fair market value of the property (in this case, the cryptocurrency) over the amount (if any) paid for the property, needs to be included in gross income. 

Generally speaking, income that you receive is considered ordinary income, unless it is a gain from the sale or exchange of a capital asset. In this scenario, if you receive cryptocurrency (whether it is Bitcoin or some other cryptocurrency) in exchange for performing a service on a crowdsourcing platform, the IRS considers that you have been compensated with property, and this currency must be reported on your tax return as ordinary income and will be subject to self-employment tax.

If you have received cryptocurrency after performing services, and have questions about the tax treatment of the cryptocurrency you have received, please contact us today for a no-obligation review of your situation. Indeed, this is an area that is complex and is always evolving, and failure to be compliant may result in numerous penalties and headaches in the long-term.