MSTR Cat

Crypto Law/Level II · Tax: the first trap/2.2 Income from crypto/Lesson 4

Getting paid in crypto

How wages, freelance fees and sales paid in crypto are taxed in dollars on the day received, who reports what, and why a falling price does not shrink the income already earned.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Converting crypto pay to dollars at once is the simplest route: income is fixed at the dollar value on receipt either way, and quick conversion leaves only a tiny gain or loss to report.
  2. Contractors deduct ordinary business expenses on Schedule C and half of self-employment tax; the 20% qualified business income deduction under section 199A remains available for 2026, subject to income thresholds.
  3. Self-employed retirement plans cut taxable income: the 2026 401(k) elective deferral limit is $24,500 (IR-2025-111); contributions must follow plan rules and deadlines.
  4. Payers need not issue Form 1099-NEC below $2,000 for payments after 2025 (Pub. L. 119-21), but all income stays reportable; keep each invoice and the dollar value used.
  5. File free with Free File Fillable Forms, which includes Schedules C and SE for tax year 2025 at any income; guided Free File software is limited to AGI of $89,000 or less.

MaterialsIRS Notice 2014-21, questions 3, 10, 11, 13 and 14 (Internal Revenue Bulletin 2014-16)The current IRS instructions for Forms 1099-MISC and 1099-NECFor each payment: the invoice or payslip, the date and time received, the units and the dollar value used

Wonder

  1. If my salary is paid in bitcoin, does my employer still withhold tax?
  2. Do I owe tax on a crypto payment if no Form 1099 arrives?
  3. What if the coin loses value before I convert it?

Explore

  1. The basic US rule is in IRS Notice 2014-21 (April 2014), question 3: someone who receives virtual currency as payment for goods or services includes its fair market value, measured in US dollars on the date received, in gross income. That amount is also the basis of the coins received (lesson 2.3.1). The rule covers a freelancer’s invoice, a shop’s sales and a tip alike. Being paid in crypto does not change whether income exists; it only adds the task of putting a dollar value on each payment, using a reasonable method applied consistently, as the notice describes.
  2. Employees are treated like any other wage earner. Under question 11 of Notice 2014-21, crypto paid as wages is valued in dollars at the date of receipt and is subject to federal income tax withholding, Social Security and Medicare (FICA) taxes and federal unemployment (FUTA) tax, and must appear on Form W-2. The employer therefore has to account for those taxes on the dollar value, just as with cash pay; the payment method does not take wages outside payroll rules. The IRS digital-assets page says employee wages received in digital assets are reported on Form 1040 like other wages.
  3. Independent contractors receive no withholding but owe more themselves. Question 10 says crypto received for services as an independent contractor is self-employment income subject to self-employment tax, which the IRS puts at 15.3% once net self-employment earnings reach $400 (lesson 2.2.1). Payers have reporting duties: the notice says crypto payments count toward the Form 1099 thresholds and can be subject to backup withholding. For payments after 2025, Public Law 119-21 raised the main threshold for Forms 1099-NEC and 1099-MISC from $600 to $2,000, with inflation adjustment possible from 2027. No form, however, does not mean no income.
  4. Businesses that accept crypto for goods record the dollar value of each payment as sales. Converting the coins later is a separate disposal: under question 6 of Notice 2014-21, there is gain or loss equal to the difference between what is received and the basis. A shop that holds coins for even a few days can produce many small gains and losses this way. Paying in crypto is a disposal for the payer too (lesson 2.1.4), so a business that pays suppliers or staff in coins may have its own gain or loss on each payment, measured against what those coins cost it.
  5. Price falls after payment do not reduce the income already earned. Example: a freelancer invoices $1,000 and receives coins worth exactly $1,000 that day, so $1,000 is income and the basis is $1,000. If the coins are sold weeks later for $700, the freelancer still has $1,000 of income plus a separate $300 capital loss, which is subject to the capital-loss limits (lesson 2.3.3). Being paid in a dollar-pegged stablecoin narrows the swing but does not remove the events: receiving it is income, and converting it is still a disposal of property (lesson 2.1.1).
  6. Outside the United States the pattern is often similar. In the United Kingdom, HMRC’s Cryptoassets Manual (page CRYPTO21100) says cryptoassets received as employment income count as money’s worth subject to Income Tax and National Insurance contributions; because exchange tokens like bitcoin can be converted to money, they are readily convertible assets, so the employer must account for tax through PAYE on its best estimate of their value. A later disposal may give rise to Capital Gains Tax. A practical check: match every crypto payment to its invoice or payslip and the dollar value recorded. This explains the law; it is not tax advice.

Key facts

  • Notice 2014-21 requires a taxpayer paid in virtual currency for goods or services to include its US-dollar fair market value on the date received in gross income.
  • Crypto paid as wages is subject to federal income tax withholding, FICA and FUTA taxes and must be reported on Form W-2.
  • Crypto received for services as an independent contractor is self-employment income subject to self-employment tax.
  • For payments after 2025, the main reporting threshold for Forms 1099-NEC and 1099-MISC rose from $600 to $2,000 under Public Law 119-21.
  • The basis of crypto received as payment is its fair market value in US dollars when received.
  • HMRC treats exchange tokens paid as employment income as readily convertible assets, so UK employers must account for tax through PAYE.

Exercise nine, six, three, one

9CollectList up to 9 crypto payments you have received or made, or would expect in a job or business, such as salary, freelance invoices, tips, sales or supplier payments.
6ClusterSort them into 6 categories: employee wages, contractor fees, sales of goods, payments you made to others, stablecoin payments, and payments whose value you did not record.
3DistillReduce the 6 categories to 3 groups: income events, disposal events, and records you would need to rebuild.
1CrystallizeWrite 1 sentence explaining why a coin that falls in value after payday does not lower the income you earned that day.

Fact check

Dates, figures and claims checked against the published sources listed below.

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