Will people who get paid in cryptocurrency share with the IRS?

by philg

A friend has been selling NFTs and getting paid in cryptocurrency. He thought that he didn’t have to pay tax on this income until the cryptocurrency was finally cashed in for dollars. I did a bit of searching and told him that the IRS wants him to pay tax in the year that the cryptocoins were received. I directed him to “Virtual Currencies” and an IRS FAQ from 2014:

Q–3: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A–3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

How many people will do this? Maybe there will be a 1099 when coins are exchanged for cash and then the holder will be motivated to declare this as a capital gain (at President Harris’s new 75 percent rate plus 13.3 percent California tax?). But if there is no reporting to the IRS of any of the flows that stay in the crypto world, isn’t there a high likelihood that people won’t pay tax either because they don’t know that they should or because they don’t think they’ll get caught?

What’s the percentage of income received in cash that gets reported to the IRS? If Hunter Biden put a $100 bill into the hands of a hard-working dancer, for example, what is the chance that she reported that $100 and paid income tax on it? (Of course, when a friend said that the Daily Mail figured out that Hunter Biden’s laptop showed epic spending on hookers and booze, I responded “And he wasted the rest of his money?”)

From Tampa, 2014:

Disclaimer: I own no cryptocurrency and am bitterly envious of all of the people who were smarter than I!

6 thoughts on “Will people who get paid in cryptocurrency share with the IRS?”

  1. The great thing about crypto-currency is that the tracking of transactions is built in by design. It is the most traceable currency in the world. You cannot use bitcoin to hide your trail — breadcrumbs are not a bug, but a feature!

    Crypto works by monetizing slack computing capability. This has the effect of a Keynesian subsidy, only without any governmental fiscal spending. Crypto-currency should probably be considered a fiscal note, and it should only have taxable value when that value is realized in dollars.

  2. Like Phil, I don’t own any Bitcoins.

    If our government is requiring taxes be paid on Bitcoin transactions then it is legitimizing Bitcoins. And sure enough it has [1] (I didn’t know this). To that end, how does a government determine the “fair market value” of Bitcoins when the government is not regulating it or can have an oversight over it?

    [1] https://public-inspection.federalregister.gov/2020-28437.pdf

  3. If cryptos ever reach multi-trillion$ market caps and wide spread acceptance, their effect will be massive inflation. It will be like 1700s France printing massive amounts of Assignats to make everyone rich – until it all crashes, the aristocracy is beheaded, and Napoleon seizes power. On the bright side, Napoleon did an amazingly job of razing random slum, then creating the geometrically aligned streets of modern Paris. What’s an Assignat? It’s a failed currency (one of many historically killed by inflation), playfully documented here:
    https://www.youtube.com/watch?v=R7GMfeasiGQ

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