Dealing with Cryptocurrency Wages
We’ve discussed bitcoin and other cryptocurrency taxation often in recent posts. Given the IRS’ recent tax collection efforts regarding cryptocurrency, this makes perfect sense. Cryptocurrency appears to be here to stay, although it seems very likely that we will see more fluctuations in its value in the near future. But the fact that it’s here to stay means that the IRS has amped up its collection efforts when it comes to cryptocurrency taxes. The letters being sent out to cryptocurrency holders – i.e. 6173, 6174, and 6174-A – are very serious, and recipients need to take immediate action if they receive one. We’ve gone over the essentials of these letters in an earlier post. In this post, we’d like to tackle another topic on cryptocurrency: cryptocurrency received as wages.
Although it’s imperative that recipients of IRS letters on cryptocurrency taxation take action, it’s also important that crypto holders understand how to plan ahead for any cryptocurrency tax liabilities they may have in the future. In this post, we’d like to discuss the basics of how to deal with cryptocurrency received as wages for services rendered. Cryptocurrency may often be paid as wages, depending on the industry and circumstances. Let’s explore this topic in a bit of detail.
Cryptocurrency as Wages: Notice 2014-21 Provides Guidance
When dealing with the issue of cryptocurrency as wages, it’s useful to refer back to the main IRS document on cryptocurrency taxation: IRS Notice 2014-21. As you may recall from our earlier posts on the topic, Notice 2014-21 classifies virtual currency as (intangible) personal property. This means that the taxation of virtual currency follows the same basic principles which apply to other pieces of personal property. The taxation will depend on the character of the gain, and the character depends on the circumstances. Virtual currency sold as a business (as in the case of a commercial exchange) constitutes ordinary income; this is also true for virtual currency received as wages. Virtual currency held as an investment will trigger capital gains taxation following a sale.
Cryptocurrency Wages Treated Similar to Stock Wages
If a person receives virtual currency as wages, this will be treated in a manner which is similar to stock received as wages. If a person receives payment for work in the form of stock, then that person will be liable for taxes on the fair market value of the stock at the time of receipt. And that person would be taxed at their ordinary income tax rate. Suppose a tech worker is paid for a month’s work in stock. Now suppose that stock has a FMV of $12,000. When the tech worker receives the stock, he or she will be taxed on $12,000 at his or her applicable tax rate. The same would be true if the tech worker received bitcoin, Ethereum, or some other type of virtual currency rather than the stock.
The tax situation gets trickier if the recipient decides to hold the cryptocurrency wages for investment purposes. Let’s suppose that the tech worker received $12,000 worth of bitcoin as wages, and immediately paid taxes on the $12,000. But, let’s further suppose that the tech worker holds the bitcoin for one year. Further, that the bitcoin jumps up to $15,000 during that time. When the tech worker sells the bitcoin after a year, the $3,000 gain is taxable at the capital gains rate. In that case, we face application of two different tax rates. That’s because the tech worker would have two distinct types of gain.
Cryptocurrency Miners May Face Self-Employment Tax
If a person “mines” bitcoin or other cryptocurrency as a business, the bitcoin is includable as gross income and be subject to self-employment tax. The same is true for independent contractors who receive bitcoin or other cryptocurrency for services renders. If an independent contractor receives $600 or more in cryptocurrency, this would require reporting on a Form 1099. The independent contractor is required to pay the self-employment tax. However, some persons mine bitcoin as employees for an established business. Those persons would simply pay taxes on the FMV of the bitcoin, as wages, in the fashion described above.
Reach Out to MC&C to Learn More Today!
As we can see, the taxation of cryptocurrency received as wages is not terribly complex. The most difficult thing is remembering that virtual currency is indeed subject to tax. Also, that resulting liabilities will be enforced by the IRS. For a long time, there was uncertainty about the taxability of bitcoin and other cryptocurrencies. But that time has passed and the IRS has made it clear that these currencies are in fact taxable. At Mackay, Caswell & Callahan, P.C., we will continue to discuss cryptocurrency taxation. If you have a liability from cryptocurrency, don’t avoid it. Get in touch with a qualified tax attorney and resolve your debt before it escalates. Call one of our top New York City tax attorneys and we can help you settle your situation today.
Image credit: Tim Reckmann