Income Will be Realized by Participants Paid in Convertible Virtual Currencies for Completing Microtasks via a Crowdsourcing Platform
The IRS has returned to the virtual currency taxation subject area, this time in a Chief Counsel Advice ruling on the tax consequences for individuals that receive convertible virtual currency in exchange for performing microtasks through a crowdsourcing or similar platform.[1]
The IRS in this memorandum looks at the tax consequences for individuals using a crowdsourcing platform to provide services. A crowdsourcing arrangement is described in the memorandum as follows:
A variety of digital platforms now enable individuals or entities to “crowdsource” jobs by using the Internet to outsource assignments to an undefined and often large group of other individuals or entities. A crowdsourcing arrangement may involve three parties referred to in this memorandum as vendors, firms, and workers. Vendors develop a platform upon which firms can broadcast their tasks and workers can accept, perform and/or submit the work.[2]
The memorandum then goes on to describe microtasking and microtasks:
Certain crowdsourcing platforms specifically facilitate the practice of microtasking, which may involve subdividing larger tasks into smaller tasks and distributing the tasks via online crowdwork platforms. In general, microtasks are simple, menial activities that still require some degree of human interaction beyond the current ability of artificial intelligence.[3]
In the case the IRS is looking at, those performing microtasks are paid in a convertible virtual currency, such as Bitcoin:
Certain microtasking platforms allow those who perform microtasks to receive payments in consideration for completing each microtask in the form of convertible virtual currency. For example, a firm may offer to pay workers in units of Bitcoin or other convertible virtual currency if the worker processes data or reviews images. Other examples include an offer of convertible virtual currency in exchange for downloading a particular app from an app store and leaving a positive review including a comment, downloading games and reaching certain milestones, completing online quizzes and surveys, or registering accounts with various online services. These types of microtasks may provide individuals with “rewards” in the form of convertible virtual currency. The value of convertible virtual currency paid in exchange for a single microtask often is a small amount that may be less than $1.[4]
The IRS had previously ruled that general tax principles apply to the taxation of transactions involving convertible virtual currencies.[5] So, normally, if a taxpayer receives a convertible virtual currency, such as Bitcoin, in exchange for performing services, the taxpayer would have taxable income equal to the value of the convertible virtual currency received. But does the answer change when the payment for the service is very small, including below $1?
The IRS concludes that the fact that the payment is small and is paid out in a convertible virtual currency does not change the result. Compensation received for services is taxable under IRC §61(a)(1) and performing a microtask is a service.
Because the term “service,” for purposes of § 61, is not defined in the Code, the term should be construed “in accord with its ordinary or natural meaning.” Smith v. United States, 508 U.S. 223, 228 (1993). A taxpayer who performs a task through a crowdsourcing platform, including a microtask, has performed a service for the party that requested the task with the expectation that he or she will receive compensation. If the taxpayer receives convertible virtual currency for performing the task, regardless of the value and the manner in which it is received, then the taxpayer has been compensated with property. See Notice 2014-21. The convertible virtual currency received must be reported on the taxpayer’s income tax return as ordinary income and may be subject to self-employment tax. See §§ 61, 83, and 1401.[6]