In 2014, the IRS concluded that you can’t skirt the payroll rules by paying employees or independent contractors in virtual currency. The currency’s fair market value on the payment date is fully taxable to employees or reportable on Forms 1099-MISC, if it’s at least $600. The advent of Blockchain and cryptocurrencies has caused the IRS to supplement its guidance.
If it’s a payment for services, it’s taxable. Cryptocurrencies don’t change the basic rule that how someone is paid—in cash or by token recorded on a distributed ledger like Blockchain—is immaterial to determining whether the remuneration is taxable. The issue is how cryptocurrencies are valued. The IRS distilled three rules:
- If you pay for services in cryptocurrency and the transaction is facilitated by a cryptocurrency exchange, the cryptocurrency’s value, and, therefore, the taxable amount, is the amount recorded by the exchange in U.S. dollars on the payment date.
- If the transaction is facilitated by an exchange but not recorded on a distributed ledger like Blockchain, or is an otherwise off-chain transaction, the fair market value is the amount the cryptocurrency was trading for on the exchange at the date and time the transaction would have been recorded on the ledger if it had been an on-chain transaction.
- If cryptocurrency doesn’t have a published fair market value (and it isn’t traded on an exchange) its value equals the fair market value of the services provided to you in exchange for the cryptocurrency when the transaction occurs.
Cash is so passé: The third rule can be a little dicey, since you need to figure out the value of the services provided. If the service provider is an employee, that’s easy enough—look at what other employees with the same skills earn. If the service provider is an independent contractor, see what other contractors are charging for the same service.
