If I were a freelance worker getting paid in cryptocurrency, would I have to claim my earnings as income? What if I never convert it to dollars?

  • 49
    Just stop for a moment and think: Would the IRS tolerate a big gaping loophole that lets people legally skip income tax on all their earnings? Or would said hole become massively popular for obvious reasons, completely eliminating one major government income stream?
    – TooTea
    May 2, 2021 at 18:31
  • 42
    Being paid in stocks does not 'avoid taxes'. Taxes are due on the FMV when they receive the stock.
    – bmargulies
    May 3, 2021 at 0:56
  • 21
    @Jonah you’re aware of a fantasy. People (very wealthy) avoid taxes with loans (using their assets as collateral which will absolutely be taken and sold if the time ever came) because loan proceeds aren’t income so you can unlock the value of stock holdings without sale via loans. You don’t magically legally avoid taxes because you received compensation in “not dollars.”
    – quid
    May 3, 2021 at 1:06
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    Two things in life you cannot avoid. Taxes and death. The short answer is YES.
    – JonH
    May 3, 2021 at 12:54
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    @quid Right, but when do I pay taxes though? I have 1 M in stock (or stock options), I put it up as collateral for a 1M loan, after 1 year I "fail to repay" my debt, the bank takes the collateral. When do I pay taxes I owe on the 1M?
    – Ant
    May 3, 2021 at 17:39

3 Answers 3


You owe as if it converted immediately to USD.

When you are paid in other currencies - Euros, Bitcoin, gold, actual chickens - you are required to do an immediate valuation in USD at the contemporary exchange rate.

You must then record your income for that date as that value in USD. That is income at that time for all tax purposes.

It is better to do this contemporaneously. It can be a chore at tax time to "go back" and compute the conversion rate months ago.

This value is coined at the time, and is irrevocable regardless of what happens to the non-USD asset. IRS is only concerned with what would have happened if you had converted it to USD immediately. So if the chickens die, Bitcoin tanks, real estate parcel fails to clear environmental review, etc... too darn bad.

An example.

On March 13, Sue is paid 10 BTC. BTC trades for $10,000 on March 13. Sue records $100,000 income in the tax books. Sue holds the BTC.

Being self-employed, Sue must file quarterly tax payments on Form 1040-ES. Sue's tax for June 15 computes to $20,000 and must be paid, even if Sue doesn't have $20,000 and hasn't cashed out any of the BTC yet. IRS doesn't care about your cash flow.

This is the lament of every game show winner who wins valuable prizes and then discovers they must pay taxes in cash! So they often don't drive away with the new car, and instead take a comparable cash prize.

Sue's least bad option is often to "file honestly, but not pay" and eat the interest and penalties. This is not as awful as it sounds, and is a viable way to "take a short term loan" to cover your taxes. IRS doesn't break knee caps and never calls except by prearrangement... and even with penalties their interest rate may be better than credit cards. They are slow to action because most taxpayers sort it out themselves in a year. Just don't push it out for years...

However, by June 15, Bitcoin's value has tanked to $1000. Sue still owes tax on $100,000 income*. IRS doesn't care that Sue's investment didn't work out.

Scenario 1. Sue desperately sells the BTC to raise money for the taxes. (mistake). IRS considers this a "buy/sell" of a security, using the acquisition value as the cost basis. So Sue files a Schedule D. Purchased March 13 for $100,000 cost basis. Sold June 15 for $10,000 proceeds. This posts as a $90,000 capital loss which is tax deductible according to the rules for that.

BTC then recovers to $20,000 by the following April 1, because businessman Meelon Usque keeps tweeting about it.

Scenario 2: Sue didn't bother selling the BTC in June because it's worthless. However, now that it blew up, Sue sells the 10 BTC on April 1. Cost basis is $100,000 on March 13 last year, proceeds are $200,000 on April 1 next year. That is a $100,000 capital gain, and it posts on next year's taxes.

So in Scenario 2, Sue got $200,000 worth of Bitcoin. Paid tax on $100,000 of it last year (as salary at salary tax rates), and paid tax on the other $100,000 next year (as long term capital gains, since "staying in it" is treated as an investment.)

Might as well convert to USD on paycheck day

Note that if Sue had immediately sold the BTC back on March 13, took the $100,000 USD, and immediately bought $100,000 worth of BTC, that would be treated exactly the same by the IRS. Therefore, transaction costs and inertia aside, there is no tax reason to stay in the currency you are paid in. You might as well immediately convert to USD (since it's immediate, it doesn't count as an investment), then take the USD and select what YOU think is the best investment.

And while you're at it, you might as well take out what you'll need to pay your taxes. E.G. Sell the BTC immediately for $100,000, then buy $80,000 of VTI, GPB, Doge, chickens, or whatever your investment preference is.

For instance, if you choose an investment that makes sense to stay over a year in (e.g. VTI), you get to pay long-term capital gains instead of short-term.

An exception: fake income was never income in the first place

However, if you later discover the currency was fake at the time you were paid, e.g. gold was only gold-plated lead, etc. ... then you were never paid in the first place, and you retroactively delete that income from your accounting books, and amend your taxes accordingly.

* An arbitrary number based on other facts in Sue's life.

  • 3
    Re fake income: Keep copious records if this happens, and be prepared to prove that the income really was fake. If someone filed a 1099-whatever (or a W-2) claiming that you received that income, and you tell the IRS that it never existed, they are going to want an explanation of that discrepancy. By far the most straightforward explanation is "tax evasion," so you need to have evidence of what really happened.
    – Kevin
    May 2, 2021 at 18:36
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    Because shared are free and money is money. (to the company, to a first approximation). those shares are fully taxable.
    – bmargulies
    May 3, 2021 at 0:58
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    @Jonah there’s three main sources of value, 1 the stock is “bought” at a discount to the market, 2 they’re receiving stock that was contingent on performance metric, 3 one or both of these things but with options not stock. All of these scenarios are taxable. Stock compensation is almost always contingent on performance and it gives the executive an incentive to perform. No one ever talks about the stock based compensation schemes that don’t get paid because the performance metric wasn’t met…
    – quid
    May 3, 2021 at 0:59
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    @Jonah because those shares have strings attached. For instance they are awarded, and their strike price is established at time X, but the options or RSUs don't actually become real (vest) until you've done some conditional thing, like stay X+3 years. May 3, 2021 at 1:06
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    @Michael yeah... or "exposure"... May 4, 2021 at 2:44

If I were a freelance worker getting paid in cryptocurrency, would I have to claim my earnings as income

Yes. There are people getting different kinds of payments as salary: car benefit, phone benefit, stock options, US dollars, even cryptocurrencies these days. All of these count as salary and you must pay taxes for them.

What if I never convert it to dollars?

If you never convert it to dollars, then the situation is probably far better if you consider the ultimate goal in life to minimize your taxes. The situation however is far worse if you consider the ultimate goal in life to maximize your wealth.

Firstly, you have to pay taxes for receiving the salary.

Secondly, you WILL observe cryptocurrencies to crash as they are the worst speculative bubble in existence today.

Thus, the crashing cryptocurrencies count as capital losses. If you happen to have any capital gains, most taxation systems let you subtract the capital losses from holding cryptocurrencies from the taxed amount.

So, you will suffer heavily (cryptocurrency crash), but hey, at least you get to pay less capital gains taxes from your other investments!

  • 8
    I disagree with the second part. If he is getting paid in cryptocurrencies he has to pay taxes for them at their estimated current value, regardless of what happens with its price in the next years.
    – SJuan76
    May 2, 2021 at 16:13
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    Just want to add that you pay taxes on the crypto earned at the current market value at the time of receiving them - this can be a nightmare for bookkeeping since you'll have to note the almost certainly different dollar-equivalent value of each different payment (even if it's always 0.001 BTC or whatever crypto you're being paid in). May 2, 2021 at 16:44
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    The majority of this answer is off topic.
    – Clay07g
    May 2, 2021 at 19:58
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    I didn't ask for your opinion about bitcoin's future value. Plus, maybe I get paid in a stablecoin like DAI or USDC.
    – Jonah
    May 2, 2021 at 21:42
  • 2
    @JSLavertu doesn't mean they're not also ridiculous speculative bubbles May 3, 2021 at 14:03

According to the IRS FAQ on Virtual Currency, you do need to pay taxes on this. See Question/answer #9:

Q9. Do I have income if I provide someone with a service and that person pays me with virtual currency?

A9. Yes. When you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income. For more information on compensation for services, see Publication 525, Taxable and Nontaxable Income.

Also see Question/answer #13:

Q13. How do I determine my basis in virtual currency I receive for services I’ve provided?

A13. If, as part of an arm’s length transaction, you provided someone with services and received virtual currency in exchange, your basis in that virtual currency is the fair market value of the virtual currency, in U.S. dollars, when the virtual currency is received. For more information on basis, see Publication 551, Basis of Assets.

Publication 525 states, in part:

Virtual currency. If your employer gives you virtual currency (such as Bitcoin) as payment for your services, you must include the FMV of the currency in your income. The FMV of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contribution Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2. Notice 2014-21, 2014-16 I.R.B. 938, describes how virtual currency is treated for federal tax purposes and is available at IRS.gov/irb/2014-16_IRB#NOT-2014-21. For further information, see IRS.gov/virtualcurrency .

You should go to the current page each year to verify this has not changed, as virtual currency is a constantly evolving topic, and the IRS may publish new rules at any time on the matter.

Note that a freelance worker will have slightly different details on how reporting and in particular withholding works; however, Pub. 525 is the place to look in any event.

  • For an indepedent contractor, as in this case, also IRS' Q#10. May 5, 2021 at 6:15

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