Yes, virtual currency paid by an employer as remuneration for services constitutes wages for employment tax purposes.
For federal tax purposes, virtual currency is treated as property. According to Notice 2014-21, general tax principles applicable to property transactions apply to transactions using virtual currency. When an employer pays an employee in virtual currency, the fair market value of the virtual currency, measured in U.S. dollars at the date of receipt, is considered wages. This means that the virtual currency is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. The employer must report these wages on Form W-2, Wage and Tax Statement.
The IRS FAQ further clarifies that the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to the same employment taxes as wages paid in cash or other forms of property.
Additionally, the Internal Revenue Manual (IRM) and other IRS guidance documents reiterate that wages paid to employees using virtual currency are taxable to the employee, must be reported by the employer on a Form W-2, and are subject to FICA, FUTA, and Federal income tax withholding.
In summary, virtual currency paid by an employer as remuneration for services is treated as wages for employment tax purposes and is subject to the same tax withholding and reporting requirements as other forms of wages.
Sources:
Notice 2014-21
Rev. Rul. 2019-24
Publication 15 (2024)
IRM Part 4. Examining Process. Chapter 23. Employment Tax. Section 5. Technical Guidelines for Employment Tax Issues
CCA 202035011
Rev. Rul. 79-391
