Paying Contractors in Crypto: How One Startup Missed Its 1099s
Sam's List Editorial | 2026-09-30
The payments were instant, cheap and cross-border. That was the pitch for paying contractors in crypto, and all three were true.
Illustrative anonymized composite, drawn from recurring patterns rather than a single engagement. Neither firm named below was involved in it. Nothing here is guaranteed or predictive.
What nobody said is that the tax paperwork does not get faster just because the money did. This startup paid nine U.S. contractors in USDC for most of 2025. In January it filed no Form 1099-NEC for any of them, because none of the payments had ever reached the accounts payable ledger. And each payment was also a sale of property by the company that nobody recorded.
Two firms fit the two halves of this problem, and this is not a ranking. Iota Finance does monthly accounting and fractional CFO work for startups, the books side. Crypto Tax Made Easy specializes in digital asset tax, the treatment side.
The Setup: Paying Contractors in Crypto From a Treasury Wallet
The company was a seed-stage software startup with a small U.S. team on payroll and a larger group of contractors. It had raised part of its round in USDC and held that stablecoin in a company wallet.
Contractors invoiced in dollars. The founder paid each invoice by sending the equivalent amount of USDC from the treasury wallet. The accounting system was connected to the bank account, not the wallet. So the invoices sat in an email folder and the payments existed only on the blockchain.
The limitation of the setup was not the stablecoin. It was the gap between where the money moved and where the books looked.
What Went Wrong: No 1099-NEC for Crypto Payments
Under IRS guidance on virtual currency, paying someone for services in digital assets is treated like paying them in property. The contractor has income equal to the fair market value of what they received. The payer's information reporting obligations are the same as for any other payment of that kind.
So the rules on 1099-NEC for crypto payments are the ordinary rules. For payments made in 2025, a business generally had to file Form 1099-NEC for a U.S. contractor paid $600 or more in the year. For payments made after December 31, 2025, OBBBA raised that threshold to $2,000, with inflation adjustments after 2026.
Seven of the nine contractors were over the $600 threshold that applied to 2025 payments. None got a form. The company had also never collected a Form W-9 from four of them, because onboarding happened in a chat channel.
The limitation: a contractor's income is taxable whether or not they receive a 1099. The missing forms were the company's failure, but they also meant contractors were likely to under-report, which becomes their problem too.
The Part Nobody Expected: Every Payment Was a Disposal
The company did not just pay out USDC. It disposed of it.
When a business uses digital assets to pay for services, it is treated as exchanging property for those services. The amount realized is the value of the services, and the company has gain or loss equal to the difference between that and its basis in the tokens it spent.
For a stablecoin that stayed close to a dollar, the gain or loss on each payment was tiny. That is why founders wave it away. But tiny is not zero, and the transactions still belong on the return. Had the company paid in a volatile token instead, each payment could have carried real gain.
| Payment | What the books recorded | What was actually true |
|---|---|---|
| Contractor invoice, USDC sent | Nothing | Contractor expense at fair market value |
| Same payment | Nothing | Disposal of property by the company |
| Year-end information returns | None filed | Form 1099-NEC due for each payee over the threshold |
| Treasury wallet balance | Last manual entry, months old | Lower by every payment made since |
The limitation: stablecoins sometimes trade slightly off a dollar, and that small gap is exactly what creates the gain or loss. It is rarely large, but it has to be computed from the records, not assumed.
The Fix for Paying Contractors in Crypto, in Sequence
Rebuild the payment register. Every outbound transfer from the treasury wallet was matched to a contractor invoice: date, token, amount, fair market value in dollars at the time, and wallet address. This is stablecoin payroll accounting in the plain sense, even though these were contractors rather than employees.
Collect the missing W-9s, then file. The company requested W-9s from the four contractors missing them and filed the late 1099-NEC forms. Paying a contractor with no taxpayer identification number on file can also create a backup withholding obligation for the payer, which the cleanup had to address. Late filing carries per-form penalties that increase the longer it goes, so the order mattered: file what is ready rather than wait for all of them.
Book the expense and the disposals. The contractor payments went into the books as expenses at dollar value. The wallet became a tracked account, and each payment was recorded as a disposal with its basis.
Change the process. Contractors are now onboarded with a W-9 or, for foreign contractors, the appropriate foreign status form before the first payment. Payments are initiated from the accounting system, which records the dollar amount, with the wallet transfer as the settlement.
The limitation: cleanup fixes the records and gets the filings in. It does not undo penalties that already attach, and the contractors may still need to amend their own returns.
How the Two Firms Fit
The books side of this is monthly startup accounting. Iota Finance is a Florida-based firm founded in 2022, with 7 employees, led by Igor Tutelman, CPA, as Managing Partner. It provides monthly accounting, tax and fractional CFO services for small businesses, startups and entrepreneurs, serves clients nationwide, and lists minimums of $200,000 income, $500,000 revenue or $500,000 raised.
Iota Finance has 14 verified client reviews on Sam's List as of 2026-09-30. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Iota Finance is a paid Sam's List member. Ratings and rankings are not indicative of future performance or results.
The treatment side is digital asset tax. Crypto Tax Made Easy is a digital asset tax firm based in Little Silver, New Jersey, founded in 2021, with 6 employees, serving clients nationwide.
Crypto Tax Made Easy has 6 verified client reviews on Sam's List as of 2026-09-30. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Crypto Tax Made Easy is a paid Sam's List member. Ratings and rankings are not indicative of future performance or results.
The limitation on both, plainly: these are small firms, seven and six people, with finite capacity and short track records, and Iota Finance's minimums put the earliest-stage companies outside its scope. Neither firm handles contractor classification disputes as a legal matter; whether someone is a contractor or an employee is a separate question.
Frequently Asked Questions
Do I have to file a 1099-NEC if I pay a contractor in crypto?
Generally yes, on the same terms as a cash payment. Paying for services in digital assets is treated like paying in property. For payments made after December 31, 2025, the Form 1099-NEC threshold is $2,000 per payee for the year, up from $600, with inflation adjustments after 2026.
Is paying contractors in crypto a taxable event for the company?
Yes. The company is treated as disposing of the digital assets it pays out, with gain or loss equal to the value of the services minus its basis in the tokens. For stablecoins the amount is usually small, but it still has to be computed and reported.
What value do I report for a crypto payment?
The fair market value of the digital assets in U.S. dollars at the time of payment. Record it for each payment when it happens rather than reconstructing it later, and keep the transaction hash with the invoice.
What does stablecoin payroll accounting need to record?
For each payment: the date, the token and amount, the fair market value in dollars at that moment, the wallet addresses, the transaction hash and the invoice or pay record it settles. With that, the expense, the disposal and the information return can all be prepared from one register instead of rebuilt later.
If you pay anyone in digital assets, check this week whether each payment has a matching dollar entry in your books. You can browse accountants on Sam's List, including the firms above.
About the author: Kimberly Green is cofounder of Sam’s List, a directory and matching platform for financial professionals.
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