It is an interesting time for the crypto sector, with increased adoption and product launches by institutions alongside an ongoing regulatory crackdown in both the United States and abroad.Even with all of that controversy and regulatory noise swirling around however, it is worth pointing out that the appeal of being paid in crypto – and bitcoin specifically – continues to increase.According to research by NYDIG, 36% of employees under the age of 30 would be interested in allocating a portion of total pay to bitcoin.Additionally, approximately 1 in 3 of that cohort, when choosing between two identical jobs, would choose an employer that helped them get paid in bitcoin.
Further research by global hiring firm Deel , analyzing over 100,000 employee contracts, indicates that the desire for crypto payroll is on the rise, especially for remote workers and those located in certain high-inflation regions.These surveys highlight the reality that certain high-profile bitcoin-as-salary examples, such as Miami mayor Francis Suarez who has pledged to turn bitcoin into a crypto-hub and has led by example taking his salary in bitcoin, which has led to an increase in both net-worth and name recognition, are not flash-in-the-pan events.
There is clearly an interest in, and appetite for, receiving compensation in the form of bitcoin, but doing so does present some challenges connected to taxes.
Let’s take a look at some things investors should keep in mind when being paid in bitcoin.
Bitcoin BTC Payroll Is Income This should go without saying, but no matter what form or timing compensation takes, it is compensation and creates a taxable event.
Even if the employee in question chooses to not sell the bitcoin received during the year, the fair market value at the time of payment is used to determine how much taxable income exists.
Tip.Ignore the redditors and other self-titled experts and work with a tax professional familiar with taxes and the crypto sector.
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dollars.This can quickly result in a situation where a taxpayer, seeking to avoid additional capital gains taxes (more on that below), might have to take on debt to have cash funds to pay taxes.
Tip.Even for taxpayers looking to ditch fiat money, taxes are – for now – only able to paid using them, so cash still has a major use case.
Tax Rates Can Differ While bitcoin that is received as part of salary or other compensation agreement will be assessed at the ordinary income tax rate, if that recipient chooses to hold on to these bitcoin, the tax rates can start to vary.For example, a taxpayer can have and ordinary income tax rate between 10% and 37% , be subject to short-term capital gains rates that also range between 10% and 37%, or incur long-term capital gains rate of between 0% and 20% if the 12-month holding period requirement is satisfied.
Tip.Tax rates and income brackets might seem strike some taxpayers as dull, but play a major role in how much is owed in taxes.
Cost Basis Tracking Is Critical One of the trickiest aspects of receiving bitcoin for payroll purposes is the necessity of tracking cost basis, an idea completely unconnected to fiat-based payroll.Especially for bitcoin, which is well known (somewhat unfairly) for having high volatility, tracking and recording the cost basis of every partial bitcoin received during every pay period can represent an unexpected and unforeseen cost and inconvenience.Simply put, the larger the difference between initial cost basis (when received) and date of sale might lead to a larger tax liability.
Tip.Tracking, recording, and maintaining documenting of the cost basis for bitcoin payroll is something every taxpayer needs to be aware of, and not simply trust that information is being recorded elsewhere.
Bitcoin Bonuses Are Still Income Despite the array of tax implications that being paid in bitcoin can create that are different from being in fiat, one aspect is relatively straight forward.
For employees whose base pay consists of fiat currency, with a bitcoin bonus at the end of the year or at some other period, this creates a simple tax scenario; the fair market on the day of payment is added to income and taxed at the appropriate ordinary income rate.
Tip: No matter what a bitcoin payment is labeled as, the IRS will continue to treat it as compensation, and tax it accordingly.
Crypto continues to make inroads into TradFi, and bitcoin for payroll is just one example.Taxpayers looking to receive some compensation in this form, however, need to be aware of the tax implications and keep informed as to these changes moving forward.
Sean Stein Smith.
