How do I report cryptocurrency received as payment?

by | May 28, 2025 | Business Taxes, Income & Revenue

Here’s what HIVE AI had to say about “How do I report cryptocurrency received as payment?”:

When you receive cryptocurrency as payment for goods or services, you must report it as income on your tax return. The IRS treats cryptocurrency (also called virtual currency or digital assets) as property for federal tax purposes, not as currency.

Reporting Cryptocurrency as Income

Basic Reporting Requirements

When you perform a service or task and receive cryptocurrency as payment, you have performed a service with the expectation of compensation. If you receive convertible virtual currency for performing the task, regardless of the value and the manner in which it is received, then you have been compensated with property. The convertible virtual currency received must be reported on your income tax return as ordinary income and may be subject to self-employment tax. IRS Determination-202035011

A taxpayer who receives a digital asset, such as Bitcoin or another cryptocurrency as a payment for rent, royalties, goods or services recognizes ordinary income when the taxpayer receives the digital asset if received as part of operating a trade or business. The taxpayer will typically hold the digital asset as a capital asset thereafter. IRS IRM 4.119.4 BMF Underreporter (BUR) Program

Valuation of Cryptocurrency Received

When you receive cryptocurrency as payment, you need to determine its fair market value in U.S. dollars at the time of receipt. This value becomes your basis in the cryptocurrency and is the amount you report as income.

When determining whether transactions are reportable, the value of the virtual currency is the fair market value of the virtual currency in U.S. dollars on the date of payment. Notice 2014–21

When a payment is made or received in a foreign currency, the U.S. dollar amount shall be determined by converting such foreign currency into U.S. dollars on the date of the transaction at the spot rate or pursuant to a reasonable spot rate convention. For example, a payor may use a month-end spot rate or a monthly average spot rate. A spot rate convention must be used consistently with respect to all non-dollar amounts reported and from year to year. Such convention cannot be changed without the consent of the Commissioner or his or her delegate. Tresuary Reg. 1.6050W-1

You can typically determine the fair market value by:

  • Using the exchange rate from a major cryptocurrency exchange where the cryptocurrency is listed
  • Using the exchange rate published by a reputable cryptocurrency pricing service
  • Using the value agreed upon with your customer at the time of the transaction

Where to Report Cryptocurrency Income

For Business Income

If you receive cryptocurrency as part of your business or self-employment activities:

  • Schedule C (Form 1040): Report the fair market value of the cryptocurrency as gross receipts on Schedule C if you’re a sole proprietor.
  • Self-Employment Tax: The cryptocurrency income may be subject to self-employment tax if received as part of your trade or business. IRS Determination-202035011 Calculate this on Schedule SE.

A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payors must issue Form 1099-MISC. IRS – Publication 5315: Information Reporting Advisory Committee Public Report (Note: Form 1099-MISC has been replaced by Form 1099-NEC for nonemployee compensation since 2020)

For Employment Income

Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes. IRS – Publication 5315: Information Reporting Advisory Committee Public Report

For Rental or Investment Income

If you receive cryptocurrency as rental income or other passive income:

  • Report on Schedule E for rental property income
  • Report on the appropriate schedule for other types of income (Schedule B for interest, etc.)

Digital Asset Question on Tax Return

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must check one box answering either “Yes” or “No” to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023. IRS Newsroom – IR-2024-18 – Taxpayers should continue to report all cryptocurrency, digital asset income

Normally, a taxpayer must check the “Yes” box if they:

  • Received digital assets as payment for property or services provided;
  • Received digital assets resulting from a reward or award;
  • Received new digital assets resulting from mining, staking and similar activities;
  • Received digital assets resulting from a hard fork;
  • Disposed of digital assets in exchange for property or services;
  • Disposed of a digital asset in exchange or trade for another digital asset;
  • Sold a digital asset; or
  • Otherwise disposed of any other financial interest in a digital asset. IRS Newsroom – IR-2024-18 – Taxpayers should continue to report all cryptocurrency, digital asset income

Information Reporting Requirements

Forms You Might Receive

  • Form 1099-NEC: If you provided services as an independent contractor and were paid in cryptocurrency worth $600 or more.
  • Form 1099-K: In general, a third party that contracts with a substantial number of unrelated merchants to settle payments between the merchants and their customers is a third party settlement organization (TPSO). A TPSO is required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000. When completing Boxes 1, 3, and 5a–1 on the Form 1099-K, transactions where the TPSO settles payments made with virtual currency are aggregated with transactions where the TPSO settles payments made with real currency to determine the total amounts to be reported in those boxes. Notice 2014–21
  • Form W-2: If you received cryptocurrency as an employee.

Backup Withholding Requirements

Payments made using virtual currency are subject to backup withholding to the same extent as other payments made in property. Therefore, payors making reportable payments using virtual currency must solicit a taxpayer identification number (TIN) from the payee. The payor must backup withhold from the payment if a TIN is not obtained prior to payment or if the payor receives notification from the IRS that backup withholding is required. Notice 2014–21

Special Considerations

Cryptocurrency Received Then Held as Investment

A taxpayer who receives a digital asset, such as Bitcoin or another cryptocurrency as a payment for rent, royalties, goods or services recognizes ordinary income when the taxpayer receives the digital asset if received as part of operating a trade or business. The taxpayer will typically hold the digital asset as a capital asset thereafter. IRS IRM 4.119.4 BMF Underreporter (BUR) Program

This means:

  • You report the fair market value as income when received
  • Your basis in the cryptocurrency becomes that fair market value
  • If you later sell or exchange the cryptocurrency, you’ll report capital gain or loss based on the difference between your basis and the fair market value at the time of disposition

Large Cash Transaction Reporting (Form 8300)

The Treasury Department and Internal Revenue Service issued an announcement informing businesses that they do not have to report the receipt of digital assets the same way as they must report the receipt of cash until Treasury and IRS issue regulations. The Infrastructure Investment and Jobs Act revised the rules that require taxpayers that are engaged in a trade or business to report receiving cash of more than $10,000 by considering digital assets to be cash. Announcement 2024-4 provides transitional guidance as Treasury and the IRS implement the new provisions. This particular provision requires Treasury and the IRS to issue regulations before it goes into effect. The announcement does not affect the rules in effect before the Infrastructure Investment and Jobs Act for cash received in the course of a trade or business, which must be reported on Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, within 15 days of receiving the cash. Treasury and the IRS intend to issue proposed regulations to provide additional information and procedures for reporting the receipt of digital assets, giving the public an opportunity to comment both in writing and, if requested, at a public hearing. IRS Newsroom – IR-2024-12

Record-Keeping Best Practices

When receiving cryptocurrency as payment, maintain detailed records including:

  • The date you received the cryptocurrency
  • The fair market value of the cryptocurrency in U.S. dollars at the time of receipt
  • The cryptocurrency exchange rate used to determine the value
  • The purpose of the transaction (what goods or services you provided)
  • Documentation of the transaction (invoices, receipts, contracts)
  • The cryptocurrency wallet or address where you received the payment
  • Any fees associated with the transaction

Good record-keeping is essential because cryptocurrency transactions may not generate the same paper trail as traditional payment methods, making it more difficult to reconstruct your tax situation later if records are incomplete.

Conclusion

Receiving cryptocurrency as payment for goods or services is a taxable event. You must report the fair market value of the cryptocurrency in U.S. dollars as income on your tax return. The specific forms and schedules you use depend on the nature of your business or income-generating activity.

After receiving cryptocurrency as payment, if you continue to hold it, any subsequent appreciation or depreciation in value will be treated as a capital gain or loss when you eventually sell or exchange it.

Given the complex and evolving nature of cryptocurrency taxation, consider consulting with a tax professional who specializes in digital asset taxation to ensure proper compliance with all reporting requirements.

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