If you’re self-employed and are considering virtual currency as a payment method, you’ll be surprised to find that not much will change for you in terms of tax reporting. That being said, there’s still a few details to go over.
First, the IRS classifies virtual currency (or digital assets) as property, not cash. Virtual currency falls in line with other property like stock. So, when you provide a service and get paid with virtual currency, you’re exchanging a service for a property.
As an independent contractor, you’re still obligated to report income over $400 on your Schedule C and to pay self-employment tax on that income. The individual or company that paid you still has to report payments made to you over $600 to the IRS. In this regard nothing has changed.
The only thing that has changed is how you calculate the income you receive. In a regular cash transaction, let’s say you charge $100 for your service, the buyer pays you and you report those $100 straight on your return. If you receive virtual currency, you’ll have to report the Fair Market Value (in US dollars) of that payment. The FMV is what the currency was going for on the market on the day you received it. This makes it important to keep detailed track of your virtual receipts.
It’s possible you might not receive any tax form showing your income in virtual currency. You’ll still have to report it. For a few years now the IRS has added a question at the top of the 1040 asking if you’ve received or sold digital assets. If you got paid in virtual currency, click “Yes”. Although slowly, the IRS is cracking down on taxpayers who might owe taxes because of virtual currency transactions.
the Confident Taxpayer 