Many of you probably noticed that question on the top of your tax return last year (and this) which asks if “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Many people ignored the question and let their tax preparers check the box. But since the IRS is getting more aggressive in tracking virtual currency transactions, here is a bit of background information to recognize if this question applies.
The IRS defines virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”
Cryptocurrency, which some may think is synonymous with virtual currency, is actually a type of virtual currency. Cryptocurrency utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. Cryptocurrency can be used like money, but it is not legal tender in the US.
Some virtual currency is referred to as “convertible,” which means it has an equivalent value in real currency, and can either be traded or it can be exchanged into US dollars and into other real or virtual currencies. Bitcoin is an example of this.
It’s important to note that for US tax purposes, virtual currency is treated as property, not as actual currency, i.e. there is no foreign currency gain or loss from virtual currency.
Gig Economy Income
First, let’s define the term “gig”. What may come to mind is a musician going to play a “gig”, a word which apparently came into use as slang for the word “engagement”. But this actually can give an idea of what a gig in the gig economy can be. The term gig economy basically encompasses all types work, services or goods provided “on-demand,” often on a free-lance, temporary or short-term basis. Gig workers can include independent contractors and workers or providers via a digital platform, i.e. an app or a website, such as ridesharing, rentals of property or equipment, professional or creative services, you name it
And now to the point. The IRS wants potentially unsuspecting taxpayers to know that all of this gig economy income is taxable in the US – even when the transaction is in cash, even when it’s small amounts, and even when there is no receipt, and no reporting statement like a 1099 or a W-2, and even when it’s not even money being exchanged but goods being bartered. Oh, and even when the transaction involves virtual currency (more on that below.) And by “taxable” that means if it is free-lance or independent contractor income or business income reported on Schedule C, it’s subject to self-employment taxes as well as income taxes.
The IRS has even created a special web site on this subject called the Gig Economy Tax Center with more how-to details, such as keeping expense records, classifying workers and filing information and tax returns.
