On Friday, 28th August 2020, the US Internal Revenue Service (IRS) said in a memo that cryptocurrencies earned from carrying out small tasks, valued as low as $1, are taxable. Ronald Goldstein, IRS senior technician reviewer, and memo author, also added that cryptocurrencies are a substitute for real money; hence taken as property for federal income tax purposes according to section 61(a) of the IRS tax code.
IRS responded to a 29th June request this year for clarification on whether cryptocurrencies earned by an individual from performing a microtask through a crowdsourcing or a similar platform, are a taxable income. The convertible digital currency is taxable, similar to ordinary income.
Examples of Microtasks Where Cryptocurrencies are Taxable
The IRS included some examples of microtasks where cryptocurrencies earned are taxable in its memo. One example of micro-tasking is a company paying workers in digital currencies for data processing or reviewing images.
Some microtasks give individuals rewards in digital currencies,which are taxable. Some of the microtasks include downloading apps and posting positive reviews, downloading games, reaching particular milestones when playing online games, filling online quizzes, or even registering accounts using various online services.
IRS Release a Revised Form 1040 Draft
On 20th August, the IRS released a draft of Form 1040, which Americans will use to file 2020 tax returns. American taxpayers will give information on whether they engaged in any cryptocurrency transactions. On page one of Form 1040, individuals will get to declare whether they received, sold, sent, exchanged, or acquired any financial interest in digital currencies.
The question about cryptocurrencies asked in Form 1040 shows that the regulator is making an effort to know how many taxpayers are using cryptocurrencies. The IRS is concerned that many American taxpayers are not forthcoming on income and losses from cryptocurrency trading.
Sending Crypto “Soft Letters” of Disputed Legality to American Taxpayers
On 14th August 2020, the IRS sent letters to unknown numbers of taxpayers, broadly inquiring about evaded and incorrectly paid taxes from digital currencies. According to the regulator, this was a “soft letter” campaign, a call-to-action meant to trigger taxpayers to file and pay their cryptocurrency taxes correctly.
In 2017, the IRS tried to get Coinbase to give them information on all its traders, looking forward to curbing tax evasion. However, this eased off over concerns that the IRS was overstepping Coinbase’s authority.
In 2018, the IRS reported that only 0.04 percent said their cryptocurrency holdings information. The report showed a significant percentage of American cryptocurrency traders avoided paying tax on their virtual asset holdings.