Paying Employees In Cryptocurrency – All You Need To Know!
Can I Pay Employees in Crypto?
The innovation and advancement in the tech industry and the digital world have encouraged everyone, including individuals and corporates, to take advantage of the massive cryptocurrency gains in the digital currency market. Individuals, including experienced investors and young tech-savvy individuals, are motivated to get hands-on experience in the crypto market.
With the increasing hype and headlines, each day witnesses interesting trends in the world of digital currencies. The acceptability of cryptocurrency payments for goods and services has encouraged many businesses to consider paying employees in cryptocurrency. So, is it a feasible option to pay wages in crypto?
To answer this question, let’s understand cryptocurrency, the pros and cons, the legal aspect of offering this compensation option, and the best practices for employers and employees.
Is it Legal to Pay Wages in Crypto?
The precise answer to this question is that the legal status of crypto wages differs depending on the region of a company’s operations.
In the U.S., regulations vary according to state laws which means that paying wages in crypto could lead to issues arising at the local level. For example, the Illinois Wage Payment and Collection Act states that remuneration to employees needs to be made in the lawful money of the United States.
Similarly, employers in New York can only pay wages in cash, direct deposit, paycheck, or through a payroll card. In contrast, other states specifically require wages to be paid in U.S. dollars.
U.S. Labor Department Statement About Paying Wages in Crypto
The U.S. Labor Department states that under federal law, minimum wage and overtime pay needs to be made in negotiable instrument payable or cash. However, all other compensations, such as bonuses, can be paid in crypto.
On the other hand, fluctuations in the cryptocurrency market can lead to a violation of state law. For example, an employee will receive their next paycheck in the form of Bitcoin. If the price of Bitcoin decreases between the date of payroll submission and the date of receiving the payment, this could lead to a potential claim of unpaid wages.
IRS Statement About Paying Wages in Crypto
The Internal Revenue Service (IRS) provides a reference list of frequently asked questions (FAQs) and highlights the tax implications of receiving wages in crypto. Remuneration received in virtual currency is subject to federal employment taxes. The FAQs explain the treatment of wages received in crypto in Form W-2 (Wage and Tax Statement).
Fair Labor Standards Act and Cryptocurrency Payments
Employers paying in crypto need to understand the FLSA’s overtime requirement to ensure they are in compliance with U.S. laws. The FLSA states that employers pay regular and overtime wages in a negotiable instrument, which means that it can be done through fiat currency only.
Moreover, paying minimum wage and making overtime pay for non-exempt employees would violate the FLSA guidelines. The U.S. Department of Labor (DOL) enables employers to pay foreign currency if the amount meets the FLSA requirements so businesses can pay regular wages in dollars and compensation beyond it in crypto assets.
How to Pay Employees in Cryptocurrency
Once you decide to make payments to employees in cryptocurrency, here are some best practices to follow:
Employers may be obliged to get written authorization from employees indicating their approval of remuneration in crypto while understanding the risks and benefits of these transactions. It would be a wise decision to work with an attorney and draft an authorization form.
In addition, employers need to partner up with a third-party vendor so that funds can be converted into virtual currency and transferred to each employee’s digital wallet. Although you can pay employees in cryptocurrency, the overtime and minimum wage payment need to be made in the regular currency in compliance with the U.S. Department of Labor (DOL) laws.
Moreover, companies can opt for paying staff partly in crypto and cash while taking into account state law and tax regulations. Employees will be liable to pay income taxes when they receive crypto as compensation and capital gains tax when they sell crypto at an increased value as compared to when it was acquired.
Pros and Cons of Paying Employees in Cryptocurrency
Paying employees in cryptocurrency has several potential advantages and disadvantages.
- Transaction speed – Crypto transactions can be completed instantaneously without any time-consuming procedures, such as through the banking system allowing employees to receive their remuneration immediately.
- Transaction fees – Cryptocurrency processing has lower transaction costs, enabling businesses to pay employees without incurring high fees.
- Tax efficiency – The laws regarding cryptocurrency vary according to a company’s operation region. Paying employees with cryptocurrency can generate tax efficiency for several employees.For example, Bitcoin is treated as a property in the United States. Bitcoin owners are required to pay capital gains tax (CGT) which is applied on the sale of any cryptocurrency that has appreciated in value since it was acquired.Therefore, many high-salary employees prefer receiving crypto compensation rather than cash salary when the CGT is lower than the high-income tax bracket.
- Workforce appeal – Paying employees in the form of cryptocurrency acts as a hiring incentive for young individuals and the global workforce in general who understand and use crypto and want to minimize their reliance on other authorities, such as financial intermediaries. Therefore, making remunerations in crypto can provide a distinctive recruiting edge to any business.
- Potential gains – One of the unique features of the crypto market is its constant fluctuation in value. Therefore, it carries a great investment potential allowing employees to get a better value than they would have received through cash payments.
- Compliance – Laws related to cryptocurrency constantly evolve and vary greatly based on location. Therefore, it is difficult to ensure that companies paying employees in cryptocurrency comply with federal law as well as local laws.
- Volatility – The world of virtual currencies experiences great volatility, which could increase or decrease the value of payments within a short time, leaving them worthless. Therefore, making base salary payments to employees in cryptocurrency carries a high amount of risk.
- Inconsistency in global integration – Cryptocurrency lacks integration with the banking and finance systems making it a major challenge on the logistics part, such as paying cryptocurrency as salaries. Many financial institutions, including banks, do not recognize virtual currency and offer no option to integrate payments for goods and services.
Moreover, cryptocurrency is not treated as lawful money or legal tender in many countries, making it a global challenge to pay employees in cryptocurrency.
Are Crypto Payments Subject to Taxes?
Payments made in crypto are treated differently according to the legal regulations in various countries and carry different tax implications for employees and how employers choose to distribute crypto.
The tax implications for employees receiving crypto vary according to the type of payment. For example, if employers pay bonuses, they are treated as fringe benefits and are treated in compliance with the Fringe Benefits Tax Assessment Act 1986, which accounts for 47% of the taxable value. Crypto gifts and bonuses of less than $300 per year are exempted from this tax.
Just buying and holding crypto is not taxable in the U.S., as all taxes are applied to capital gains in the event of selling or using a cryptocurrency. However, in the U.K., cryptocurrency taxes are applicable to the current market value at the time of making payments.
Companies Paying Wages in Cryptocurrency
The increasing demand and acceptability of payments in the cryptocurrency by the top companies, including Microsoft and Tesla, has encouraged businesses to pay wages in crypto. Some companies that offer compensation in crypto include GMO Group, BitShares, SC5, Fairlay, and Bitwage.
- GMO Group- Focuses on online advertising, media, and internet finance.
- BitShares- A cryptocurrency exchange platform that allows the trading of virtual currencies and pays its employees wages in crypto.
- SC5 – A Finnish company that offers application and software development services.
- Fairlay- A cryptocurrency exchange and a prediction platform that pays its employees in Bitcoin.
- Bitwage- A solution provider that caters to services such as payroll and invoicing.
FAQs: Is Paying Employees in Crypto Worth It?
What is the legal status of paying employees in crypto?
The laws related to cryptocurrency are different throughout the world, and they might be treated as legal tender in some countries, such as El Salvador, whereas they are banned in some countries, such as China. Even if cryptocurrency exchange is accepted in a country, it does not necessarily mean that it can be used to pay wages.
What are the tax implications of making cryptocurrency payments to employees?
The state law for making a payment to an employee in crypto is different in compliance with the regulations of each country. For example, tax is due on all earnings in the U.K., which means that cryptocurrency holders are liable to pay taxes in accordance with the fair market value at the payment time.
On the other hand, the IRS treats cryptocurrency as property, and owners are liable for tax payments on capital gains.
How to be smart about paying employees in crypto?
Crypto compensation can be a convenient option with multiple potential benefits, but it will take time until it is well-understood and coordinated amongst different state and legal authorities.
Moreover, this process still needs regulatory guidance and confidence so that it can be completed without any inconvenience. Employers need to take into account multiple aspects when making their remuneration decision, such as tax implications, legal aspects, and the regulatory environment.
There is no question about the feasibility, and positive impact cryptocurrency has made on the global financial paradigm, including the payroll procedure of many companies, such as in the United States.
However, the use of digital currencies is still prohibited in many countries, including China which puts a question mark on the use of cryptocurrency as a compensation option.
As the use of cryptocurrency to pay employees is a relatively new concept, it will take some time until it becomes a reliable business practice. Therefore, the decision to pay employees in cryptocurrency should be considered through a holistic perspective by taking into account all concerning factors such as tax implications, legal aspects, and employee well-being.
Lastly, please note that this is not a piece of financial advice, and employees as well as employers need to understand the risks of cryptocurrency before making their decisions.
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.