What to make of the IRS's memo on 'microtasking' and crypto income

"Is convertible virtual currency received by an individual for performing a microtask through a crowdsourcing or similar platform taxable income?"

Just over a week ago, the U.S. Internal Revenue Service (IRS) raised this question in an otherwise inconspicuous memo. The agency then answered it: "A taxpayer who receives convertible virtual currency in exchange for performing a microtask through a crowdsourcing platform has received consideration in exchange for performing a service, and the convertible virtual currency received is taxable as ordinary income," wrote Ronald Goldstein of the IRS's Income Tax and Accounting Division.

At first glance, it would seem obvious that such income is taxable. If a user performs an action in an exchange for something — in this case, property — they have earned it as income. So does the "microtask" memo have any deeper meaning than that? Either way, the statement in the memo is a window into the IRS's thinking on crypto taxation.

As The Block has reported in the past, the IRS has spent the past year slowly but surely hinting at its intent to develop more robust compliance and investigative efforts. A so-called tax summit in early March represented a semi-public demonstration of this dynamic, showcasing how the government bureaucracy is dealing with — and being tested by — a fast-evolving financial technology landscape. IRS examiners asked about everything from how crypto exchanges work to the time at which a user "takes possession" of a token. Indeed, it's that type of questioning — one couched in trying to understand how the technology actually works — that may have prompted the new memo's creation in the first place. 

Lately, the avenues for earning small amounts of crypto — one might even call them "microtasks" — has only expanded. Decentralized finance, and in particular “yield farming” — earning tokens via protocols in return for providing them with liquidity — is fast gaining popularity. That makes questions like the one raised in the new memo especially pertinent, according to TokenTax founder Alex Miles. Miles told The Block that the memo is “very relevant to everything going on in the crypto space (i.e. yield farming; payments for crypto education modules etc).”

Miles went on to say:

“Getting paid in crypto is income, which needs to be reported at the USD value at time of receipt. That value becomes the cost basis when it comes time to sell. So if recipients don't keep good records they run the risk of being double-taxed by reporting those sales at $0 cost basis, instead of getting credit for the income they've already report it when they go to eventually sell it.”

Others aren’t so sure about the significance of the IRS memo, however. “I don’t think it’s that significant. I guess it gives you a bit of a window, but here’s the thing — they’ve been very clear from the very, very beginning that income in crypto is taxable. Period. That’s the law and that’s their interpretation of the law," In an interview, Jerry Brito, executive director of Washington, D.C-based Coin Center, told The Block.

Brito also pointed to now-defunct services like Earn.com, through which users could earn crypto by performing tasks as simple as answering emails (Earn.com was later bought by Coinbase). Because such participants were doing actions in return for something, that’s income. “If you made a few dollars, technically you’re on the hook for that,” said Brito.

That very well may be the case. But if so, why exactly would the IRS need to reiterate it? Is there more to this story that we're missing? The agency has long promised more clarity about crypto taxation policy, but unfortunately for crypto holders it has thus far failed to deliver much. As the new memo does not specify whether it is referring to something new or simply re-hashing a stance that the IRS has long held, now the picture is even murkier than before.