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The Gig economy has been expanding rapidly over the past decade and the number of users involved with platforms like Uber, Lyft & Airbnb has grown exponentially. The IRS recently launched the Gig Economy Tax Center on www.irs.gov. This is a brand new section of the IRS website dedicated to help gig economy workers understand their tax obligations.
According to the IRS “The gig economy—also called sharing economy or access economy—is an activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website”. Income derived from gig economy activities are taxable. It is interesting to see that the IRS is also talking about virtual currency in the Gig economy tax center. According to the website, income paid in any form, including virtual currencies are taxable. This aligns with what we already know from Notice 2014-21 and 45 Q&As issued on October 9th, 2019. The inclusion of cryptocurrency is timely as the number of platforms paying bitcoin to contractors are steadily increasing.
If you are a gig economy worker who gets paid in cryptocurrencies, below are some of the challenges you will face when filing for taxes.
You may not receive a Form 1099-Misc
Generally, if you are a contractor (the majority of the gig economy workers are contractors subject to some exceptions) and getting paid more than $600 in any tax year, you should receive a Form 1099-Misc before January 31st, indicating your total annual income. In the context of crypto, some payers may not be aware of this information reporting requirement so you may never receive a Form 1099-Misc. Even if the payer is aware of 1099-Misc reporting obligations, it may not have the technology to accurately convert & summarize the amounts paid in crypto into USD. However, it is still your responsibility to accurately calculate & report the income you earned from the platform.
Tip: If the platform does not ask you to fill out a Form W-9 during sign up, do not expect a Form 1099-Misc at the end of the year. Instead, keep good records of your income and calculate annual receipts manually, as shown below.
You may not receive a Form 1099-K (Even if you do, it may not be accurate)
Some platforms through which you can work and earn cryptocurrencies function as third party payment settlement networks. You will get a Form 1099-K from these platforms only if you have gross proceeds more than $20,000 and more than 200 transactions in a calendar year. If you earn income in the gig economy as a side hustle, most likely, you will not meet these thresholds. Therefore, you will not receive a Form 1099-K.
If you do receive a Form 1099-K, note that the amount reported on the form may not be 100% accurate. This is because 1099-Ks do not take refunds and other adjustments into consideration. Once again, it is your responsibility to accurately calculate and report income earned from these platforms.
Burden of tedious calculations
As explained on the above sections, in most cases, it becomes taxpayers’ responsibility, not only reporting virtual currency earnings, also accurately calculating those amounts. The amount that should be reported on the tax return is calculated as follows. First, convert each amount of cryptocurrency received into USD using the conversion value (or Fair Market Value) on the date of receipt. Second, sum up those totals.
For example, assume Jennet receives 0.5 BTC on April 5th 2019, 1 BTC on June 30th 2019 & 0.25 BTC on December 12th 2019 for contract work she did for a platform. She did not receive a Form 1099-Misc nor a Form 1099-K. Now she has to calculate the income to be reported on her tax return as follows.
0.5 BTC * $5,057 = $2,529
1 BTC * $10,592 = $10,592
0.25 BTC * $7,262 = $1,816
(Fair market value of BTC is obtained from this price chart)
Jennet should report $14,937 ($2,529 + $10,592 + $1,816) of income on her tax return. This amount will be taxed as ordinary income on Schedule C, Line 8 of Schedule 1 or on the applicable business tax return. This would also require her to check “yes” for the crypto question on Schedule 1 because this constitutes a “receipt” of cryptocurrency. If you have a lot of earnings during the year, it is extremely time consuming to calculate income in USD by taking conversion values on specific days. In such cases, it’s highly recommended to use a crypto tax software to automate this process.
In short, the IRS message is clear. You need to report crypto income whether you receive a tax form (1099-Misc or 1099-K) or not. In the absence of these forms (or even when you receive a Form 1099-K), accurately calculating your annual income in USD is your responsibility.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.