IRS Discusses Crowdsourcing And Convertible Virtual Currency

In a recently released memorandum, the IRS discussed the taxation of convertible virtual currency received in a crowdsourcing market. 

The issue presented in the chief counsel advice memorandum was “Is convertible virtual currency received by an individual for performing a microtask through a crowdsourcing or similar platform taxable income?”

The memorandum concluded that, yes, convertible virtual currency is taxable as ordinary income if received in exchange for performing a microtask in a crowdsourcing platform.

The memorandum explained that crowdsourcing refers the ability to use the Internet to outsource assignments or tasks to a group of individuals. In short, a person uses a platform and disseminates tasks to potential workers, who can then perform the task and submit the work (typically in exchange for a fee). 

Crowdsourcing platforms can also help with “microtasking,” which means taking a larger task and breaking it down into more manageable, bite-size tasks. As the memorandum noted, these microtasks can be “simple, menial activities that still require some degree of human interaction beyond the current ability of artificial intelligence.”

Now, the IRS has already issued several forms of guidance concerning virtual currency, which are noted in the memorandum. For example, the memo noted that, “[v]irtual currency that has an equivalent value in real currency, or acts as a substitute for real currency, such as Bitcoin, is referred to as ‘convertible’ virtual currency and is considered property for federal income tax purposes.” (For more background, read Notice 2014-21.)  Therefore, the IRS generally applies tax principles that apply to property to convertible virtual currency transactions. 

The memorandum considered the situation in which the completion of microtasks resulted in the receipt of convertible virtual currency. A typical example is “a firm may offer to pay workers in units of Bitcoin or other convertible virtual currency if the worker processes data or reviews images.” It further noted other examples such as reviewing apps, completing quizzes or surveys, or registering accounts for online series. It noted that these types of tasks may provide a “reward” of convertible virtual currency, and for a single microtask, the amount may be less than $1. 

Naturally, the memorandum noted that gross income under section 61 includes income from whatever source derived, which includes compensation for services. Using the familiar Glenshaw Glass framework, gross income includes “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”[1] Moreover, under section 83, generally the value of property exchanged for the performances of services is included in the income of the service provider. 

Here, the memorandum explained that, although the term “service” is not explicitly defined for purposes of section 61, its natural or ordinary meaning should be applied. Thus, the memorandum concluded that a taxpayer who performs a task through a crowdsourcing platform has “performed a service” with the expectation of receiving compensation. Consequently, if convertible virtual currency was received for performing the task, “then the taxpayer has been compensated with property.” Therefore, “[t]he convertible virtual currency received must be reported on the taxpayer’s income tax return as ordinary income and may be subject to self-employment tax.”

The memorandum is IRS Chief Counsel Advisory (CCA) 202035011 (dated June 29, 2020; released Aug. 28, 2020). You can read it here. 

Please note that Chief Counsel Advice memoranda cannot be used or cited as precedent. This is only a summary of the CCA and some portions have been omitted or edited — if you need advice in this area, please review the CCA in its entirety and consult a tax attorney.