7725 / What considerations apply when an employer pays employees or independent contractors using bitcoin or other virtual currency?
If a taxpayer receives bitcoin as compensation for services provided as either an employee or an independent contractor, the value of that bitcoin is treated as either wages or self-employment income, depending upon the circumstances. The fair market value on the date of receipt will be subject to withholding (including FICA and FUTA taxes) and treated as any other compensation received by an employee (and must be reported on Form W-2). Payments can become subject to backup withholding in the same manner as when payment is made in U.S. dollars.1 In keeping with this position, the IRS Counsel indicated in a late 2020 internal Tax Advice Memorandum that cryptocurrency paid for providing micro-services, like completing an online survey, processing data or reviewing images, is taxable ordinary income to the recipient, and may even be subject to self-employment taxes, depending on the circumstances.2 Every taxable event involving a taxpayer’s cryptocurrency holdings must be reported on IRS Form 8949, Cryptocurrency Tax Form.
Similarly, the fair market value of any bitcoin received by an independent contractor will be subject to self-employment tax. The fair market value must be measured in U.S. dollars on the date of receipt.3
If an employer makes a payment in bitcoin to an independent contractor that exceeds $600 in value (on a combined annual basis), the employer is required to report the payment to the IRS on Form 1099-MISC in the same manner as if the payment were actually made in “real” currency. Bitcoin transactions must be included when an independent contractor calculates estimated tax payments.
1. Notice 2014-21, 2014-16 IRB 938. See also, IRS Publication 1281, “Backup Withholding for Missing and Incorrect Name/TINs.”