If You Are Getting Paid In Crypto, You Still Need to Pay Your Taxes Polar Follow Sep 3, 2018 · 5 min read

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An article by Aaron Schnider, CPA (telegram handle: @aaronschnider) brought to you by EOS Asia, a top 21 block producer on the EOS blockchain mainnet.

(note: this is a US-centric article. All information in this article should be researched and verified by readers independently; no article online is a good replacement for a tax professional).

Congratulations; you did it! You have landed a paid gig in the blockchain world. All of your dedication and hard work is finally going to pay off — there’s just one problem; you’re going to be paid in crypto.

At first, this may not seem like a problem; you believe in crypto and want to support the cause. Although you may want to go full crypto, the fact remains that at this point-in-time, you will need to convert your crypto to USD if you want to pay your bills. As a contractor you will have certain obligations to the state and the nation in order to stay compliant within the current system of regulations.

Top 10 Things Contractors Working in the Cryptosphere Should be Thinking About

First and foremost, you are a business

So that means there’s lingo to learn and best practices to consider. Start thinking about things in terms of REVENUE (that’s taxable money coming in, payments from the vendor you are working for) and EXPENSES (ordinary and necessary business deductions). Revenue minus expenses equals NET INCOME (“net” meaning after expenses). Note that a Draw/Owner Distribution, is not considered a deduction, that’s just you taking your own money. It all sounds like a no brainer, but I promise taking the time to memorize these words will help when it comes to preparing your own tax return, or speaking with a tax preparer.

2. Keep good records!

Business income can be reduced by business expenses, so keep good records! Just like any other business, if you are incurring expenses, and these expenses are ordinary and necessary for the purpose generating revenue, then they are deductible and will reduces your overall business income.

3. You’re subject to self-employment taxes

Income, whether you are paid in USD or crypto, is subject to self-employment tax and is reported on Schedule C (assuming single member LLC or sole proprietor).

4. The IRS categorizes crypto as property

So what do you do when you are being paid in crypto? Anytime someone is paid in property (and in the eyes of the IRS that’s what crypto is) for purposes of determining the amount of income received, the property needs to be valued at its fair market value at the time of receipt. So if you were paid 1,000 EOS today for a job, and EOS is currently at 5 USD/EOS, then the amount of revenue you need to be booking is 5000 USD.

5. If you choose to HODL, your taxes will be more complicated

If you choose to hold onto your hard earned crypto and not immediately convert it into USD, you’ll be adding a little bit of complexity to your bookkeeping as you will now need to track its basis to determine the gain/loss at the eventual sale. This means that if the 1,000EOS you previously received (when EOS was 5 USD/EOS) was held on to, and then later you sold it when EOS was back up to 15 USD/EOS, you’d have a long or short term capital gain of 15,000USD. (Proceeds of 15,000 minus Basis of 5,000 equals gain of 10,000) Note: if held less than a year it’s short term, if longer than a year the gain qualifies for the more tax favorable long term capital gain treatment.

6. Use a software to track your holdings

A quick note on holding crypto…the above example may sound easy enough to calculate, but when you a constantly adding to your crypto position or taking away from your position in smaller incremental amounts you’ve now got ongoing basis calculation issues to consider. For example, when you go to sell those 1,000EOS for 15,000USD specifically which EOS are you selling? Are you selling the ones you received when EOS was at 5USD/EOS, 10? 20? or perhaps some combination. This would result in varying gains or even potentially a loss, depending on what you were using as your basis. This can get pretty complicated pretty quickly, that’s why I highly recommend using software to track your holdings. I personally like Cointracking.info and recommend it to my clients.

7. You’ve received income as soon as you receive crypto

A word of caution, choosing to hold in crypto does not avoid the eventual SE tax you’ll get hit with. If you decide to hold on to your hard earned crypto, just because you do not convert it back to fiat does not mean you can avoid reporting self employment income. Remember you had income the moment you receive the property. So keep that in mind throughout the year.

8. Business Expenses

Business expenses paid with crypto should be treated as if the crypto were sold for USD and then the expense was incurred in USD.

Example: You paid another contractor 100 EOS for services today, (EOS is currently 5 USD/EOS and that EOS paid was originally “earned” back when EOS was 9 USD/EOS), you would realize a 400 USD (or long)term capital loss (proceeds of 500 minus basis of 900), and then normal business expense for the services of 500 USD.

9. Make sure to pay your taxes “as you go”

The US tax system is a “pay as you go” system, meaning you should actually be paying your tax throughout the year, and not just when you file your tax return. That whole owing vs getting a refund part is simply how much you’re over or under when you compare what your tax is to how much you’ve paid in. Back when you were an employee, your taxes were regularly withheld from each paycheck. As an independent contractor there is no employer there to do this. This IRS still wants THEIR money (I know, collective libertarian groan). So that means you should be making quarterly estimated payments or you’ll face estimated tax penalties.

10. Hire a good CPA

There’s no reason to stumble your way through tax and accounting. A good CPA will bring you enough value and save you enough time to more than pay for themselves. He or she will not just help keep everything in line should the IRS come knocking, but can also advise you on various tax planning strategies that will help reduce your overall tax liability.

About Eos Asia:

EOS Asia is a team of world-class technical experts with international representation helping to make EOS the ultimate blockchain infrastructure for real-world applications.

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