As discussed in previous blog entries , the IRS has been engaged in an ongoing campaign intended to address noncompliance related to the use of crypto currencies, including a virtual currency compliance campaign spearheaded by the Large Business and International Division. At the heart of this issue is IRS’ position that cryptocurrency is property and not currency. It is in this light that IRS’ recent memorandum on cryptocurrency issues should be viewed.

In Chief Counsel Advice #202035011, IRS outlined the government’s position on the taxability of convertible virtual currency received in exchange for microtasking through crowdsourcing or other similar platforms.  As explained by IRS, in a typical crowdsourcing platform, vendors develop a platform upon which firms can advertise their tasks and workers can respond to those requests and perform the tasks.  Certain crowdsourcing platforms can further subdivide tasks into smaller tasks and distribute those tasks to various crowdwork platforms.  These subdivided tasks, also known as “microtasks,” are often simple, menial tasks that still require some form of human interaction beyond the current ability of artificial intelligence.  Examples of microtasking include processing data, image review, downloading apps and providing reviews, completing online surveys or quizzes, and registering accounts with various services.  When a worker performs one or some of these microtasks, he or she may receive a “reward” in the form of convertible virtual currency. 

The IRS has previously defined convertible virtual currency as any virtual currency that has an equivalent value in real currency or is a substitute for real currency (e.g., Bitcoin).  Any transaction involving an exchange of convertible virtual currency for property or services is treated as a sale or exchange of property for Federal income tax purposes.  Thus, IRS has previously stated that an exchange of one cryptocurrency for another (e.g. Bitcoin for Ethereum) is considered a taxable transaction, as is an exchange of cryptocurrency for fiat currency or goods or services (Notice 2014-21). More specifically related to the issue considered in this pronouncement, IRS has indicated that a person paying cryptocurrency to an independent contractor for the performance of services is required to report such payment to the IRS and to the payee on Form 1099-MISC.  [Id.]Accordingly, in its recent memorandum, IRS reasoned that while convertible virtual currency received in exchange for the performance of microtasks can be as little as $1 (or less),  it is nevertheless considered compensation for services that must be reported on the worker’s income tax return as ordinary income and may be subject to self-employment tax.  The fact that a de minimis amount of convertible virtual currency may be awarded in exchange for the microtask does not appear to preclude reporting requirements.

On the one hand, this memorandum may be seen as merely a logical extension of principles that IRS has previously espoused to a specific situation.  In the larger sense, however, it may be viewed as a continuing reminder that widespread adoption of cryptocurrency as a new medium of exchange for ordinary business transactions still faces significant tax hurdles in the United States. In all likelihood, the sought-after tax efficiencies would require Congressional action.