It was customary for the family to pay with whatever they had. The Parton family paid with a sack of cornmeal.
I’m pretty sure the tax law has never allowed a mileage rate for horse travel. Nevertheless, the doctor had income. Because he was paid with property, the measure of the income was the value of the cornmeal.
Dolly was born in 1946. The tax law formalized the treatment of property for services in 1969. The 1969 legislation was intended more for receipt of stock by corporate executives than for cornmeal. However, the law applies equally to both forms of property.
Because of the 1969 legislation, we know how to tax the receipt of corporate stock, options to receive stock, capital interests in partnerships, and funded deferred compensation arrangements. We could also cover cornmeal or livestock if needed.
As time marches on “progress” includes the creation of new forms of property. A service provider today may be paid in cryptocurrency. Cryptocurrency refers to convertible virtual currency that maintains peer-to-peer, decentralized records protected by cryptography.
Some young people talk of cryptocurrency as if it is currency. However, in the eyes of the federal government, and therefore the IRS, it is property.
If a service provider is paid in cryptocurrency, he or she has income. The measure of that income is the fair market value of the virtual currency at the time it is transmitted.
Cryptocurrency can create valuation issues that would be avoided if services were paid with U.S. currency. Because it is property, the payer may also have a gain or loss on the transfer to the service provider.
The service recipient’s gain or loss is measured by the change in value from the time they acquired the virtual currency and the time it was transferred. This value may be difficult to determine when the transfer is off an exchange.
It may also be a challenge to identify the unit of currency transferred. Virtual currency does have a unique identifying unit. The payer may specifically identify what was transferred or use an averaging convention to determine their cost.
Once the service provider reports income for the value of the virtual currency received, he or she now has a “basis” in the currency. Because the currency value will be changing, when it is later transferred for value a gain or loss will be realized.
This gain or loss will be capital in nature because the cryptocurrency is treated similar to an investment. The tax complexity at date or receipt and date of transfer of the cryptocurrency will probably be a surprise to the service provider.
It may get worse. So far, I have assumed the service provider is like Dolly’s doctor – an independent contractor.
If an employee is paid with cryptocurrency, the employer will need to ensure compliance with federal and state labor law. The Fair Labor Standards Act requires nonexempt employees to be paid a minimum wage and to be paid for overtime.
It is not clear how compliance with labor law is measured when payment is made in a medium other than U.S. currency. At least a few state employment laws require that wages be paid in U.S. currency.
The volatility of exchange-traded cryptocurrency could lead to employee claims that wage laws were violated if the value of the cryptocurrency drops shortly after conveyance. The outcome of such a claim is currently unknown.
With all these issues, why would a service provider want to, or be willing to, be paid in cryptocurrency? Perhaps the service provider thinks the receipt of cryptocurrency will not be taxable.
If the recipient is an employee, this is not likely. The employer has tax reporting obligations (Form W-2) and tax withholding obligations. The employer should be unwilling to agree to circumvent these obligations.
If the recipient is a contractor then the payer may or may not have a tax-reporting obligation. However, the recipient still has income.
Don’t assume the virtual currency is under the IRS radar. The IRS is very aware of how cryptocurrency is being used and its detection is a high priority item.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.