In answering the question of whether a cryptocurrency transaction is subject to self-employment tax, it is important to obtain an understanding of the difference between capital gains/losses, income/loss from a trade or business, and other income. As self-employment tax represents an additional 15.3% cut that the IRS could take, it's important to understand when this tax is applied. As the subject matter of capital gains has been covered extensively in other articles, I will limit the discussion of this article to income/loss from a trade or business and other income.
Income from a Trade or Business
A trade or business has previously been defined by the courts as "holding one’s self out to others as engaged in the selling of goods or services." (Deputy v. du Pont, 308 U.S. 488 (1940), Frankfurter, J., concurring). The definition is further refined by Revenue Ruling 58-112 which clarifies that a trade or business activity is one that is regular, frequent and continuous. Regularity of activities and transactions being important elements. Note that while a taxpayer need not make a profit from a trade or business; ongoing activity is an important element.
The application of the above ruling is further extended to cryptocurrency mining through Notice 2014-21 Q-8 & Q-9 explicitly stating that cryptocurrency mining is subject to self employment tax. Being paid in cryptocurrency for performing services is also explicitly called out as subject to self employment tax. Depending on the regularity, receiving referral fees might also constitute self-employment income as well as receiving cryptocurrency from posting on a social media site (hint). Also, Q-7 from Notice 2014-21 specifies that ordinary income treatment as well as self-employment taxes will be applied to any taxpayer that holds cryptocurrency as inventory for sale to customers.
Other Income
Revenue Rulings 58-112, 55-431 and 55-258 indicate that some infrequent income-generating activities represent other income. An important element to determining whether income falls into this category is whether the taxpayer attempts to engage in the activity on a regular basis.
For cryptocurrency, forks in a coin more likely than not result in other income as opposed to self-employment income. Any infrequent events which give rise to an award of cryptocurrency will also fall into this category.
Reference
https://www.journalofaccountancy.com/issues/2009/jul/20091639.html
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.