How do I calculate my income if I provide a service and receive payment in virtual currency

To calculate your income when you provide a service and receive payment in virtual currency, you must recognize the fair market value of the virtual currency in U.S. dollars at the time you receive it. This is how you should proceed:

1. Determine the Fair Market Value (FMV):
   • The FMV of the virtual currency is measured in U.S. dollars as of the date and time you receive the virtual currency. For on-chain transactions, this is the date and time the transaction is recorded on the distributed ledger.
2. Include in Gross Income:
   • The FMV of the virtual currency received as payment for services must be included in your gross income. This applies whether you perform the services as an employee or as an independent contractor.
3. Ordinary Income:
   • The income recognized from receiving virtual currency in exchange for services is considered ordinary income. This is consistent with the general tax principles applicable to property transactions.
4. Self-Employment Tax:
   • If you are an independent contractor or self-employed, the income from the virtual currency may also be subject to self-employment tax.

Example Calculation:

Suppose you provide a service and receive 0.5 Bitcoin as payment. On the date you receive the Bitcoin, the FMV of 1 Bitcoin is $40,000.

• Step 1: Determine the FMV of the virtual currency received.
  • 0.5 Bitcoin * $40,000 (FMV per Bitcoin) = $20,000
• Step 2: Include the FMV in your gross income.
  • You must recognize $20,000 as ordinary income.

Legal References:

• Notice 2014-21: Virtual currency is treated as property, and general tax principles applicable to property transactions apply.
• Rev. Rul. 2019-24: Provides guidance on the tax treatment of virtual currency transactions.
• Section 61 of the Internal Revenue Code: Gross income includes all income from whatever source derived, including compensation for services.
• Section 83(a) of the Internal Revenue Code: Property transferred in connection with the performance of services is included in gross income.
• IRS FAQ (2023): Clarifies that the amount of income recognized is the FMV of the virtual currency in U.S. dollars when received.

By following these steps and guidelines, you can accurately calculate and report your income when receiving virtual currency as payment for services.

Sources:
Notice 2014-21
Rev. Rul. 2019-24
Publication 544 (2023)
Instructions for Form 8949 (2023)
CCA 202035011