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It’s an interesting time for the crypto sector, with increasing institutional adoption and product launches, as well as continued crackdowns from regulators both in the United States and abroad. However, despite all this controversy and regulatory noise, it’s worth noting that the appeal of payments in cryptocurrencies — and Bitcoin specifically — continues to grow. According to a study by NYDIG, 36% of workers under the age of 30 would be interested in investing part of their total salary in Bitcoin. Additionally, when faced with choosing between two identical jobs, about one in three of this cohort would choose an employer that would help them get paid in Bitcoin.
Further research from global recruitment firm Deel, which analyzes over 100,000 employee contracts, suggests that the desire for crypto payroll is increasing, particularly for telecommuters and those based in certain high-inflation regions. These polls underscore the reality that certain high-profile bitcoin salary examples, such as Miami Mayor Francis Suarez, have promised to turn bitcoin into a crypto hub and have led by example by spending his salary in bitcoin, leading to a… The increase in net worth and notoriety are not flash in the pan.
There is clearly an interest and interest in receiving compensation in the form of bitcoin, however this comes with some tax challenges. Let’s take a look at some things investors should consider when making payments in Bitcoin.
BitcoinBTC payroll is income
This should go without saying, but whatever the form or timing of the compensation, it is compensation and creates a chargeable event. Even if the relevant employee chooses not to sell bitcoins received during the year, the fair market value at the time of payment will be used to determine taxable income.
Top. Ignore Redditors and other self-proclaimed experts and work with a tax expert who knows taxes and the crypto sector.
Bitcoin rich and cash poor
Building on the above point, receiving some (or all) salary in bitcoin will result in a tax liability, but under current IRS guidelines it is not possible to settle tax liabilities with anything other than US dollars. This can quickly mean that a taxpayer looking to avoid additional capital gains taxes (more on that below) may need to borrow to have cash available to pay taxes.
Top. Even for taxpayers who prefer not to use fiat money, it’s the only way to pay taxes right now, so cash is still an important use case.
Tax rates may vary
While bitcoins received as part of a salary or other compensation arrangement are assessed at the normal income tax rate, tax rates may vary if the recipient chooses to keep those bitcoins. For example, a taxpayer may have a normal income tax rate of between 10% and 37%, be subject to a short-term capital gains rate that is also between 10% and 37%, or be subject to a long-term capital gains rate of between 0%. and 20% if the 12-month holding period requirement is met.
Top. Tax rates and income brackets may seem boring to some taxpayers, but they play an important role in the size of your tax liability.
Tracking the cost base is critical
One of the most difficult aspects of getting bitcoin for payroll is the need to track the cost basis, an idea that has absolutely nothing to do with fiat-based payroll. Especially with bitcoin, which is (somewhat unfairly) known for its high volatility, tracking and recording the cost basis of each fractional bitcoin received during each payment period can present unexpected and unforeseen costs and inconveniences. Simply put, the greater the difference between the purchase price (when you receive it) and the sale date, the higher the tax liability can be.
Top. Tracking, recording, and maintaining documentation of the Bitcoin payroll cost basis is something every taxpayer needs to be aware of and not simply trust that the information is being captured elsewhere.
Bitcoin bonuses are still income
Despite the variety of tax implications that a payment in bitcoin can entail that differs from a payment in fiat currencies, one aspect is relatively simple. For employees whose base salary is fiat currency and receive a bitcoin bonus at the end of the year or at any other time, a simple tax scenario arises; The fair market value on the date of payment is added to the income and taxed at the appropriate normal income rate.
Tip: Regardless of how a bitcoin payment is labeled, the IRS will still treat it as compensation and tax it accordingly.
Cryptocurrencies continue to make inroads into TradFi, and Bitcoin for payroll is just one example. However, taxpayers wishing to receive compensation in this form need to be aware of the tax implications and keep up to date with future changes.
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I am a professor at the City University of New York – Lehman College. I am a member of the Advisory Board of the Wall Street Blockchain Alliance, where I lead the Accounting Work Group. I also chair the NJCPA’s Emerging Technologies Interest Group (#NJCPATech). I sit on the advisory board of Gilded, a TechStars ’19 company and AICPA-CPA.com Startup Accelerator participant. In 2019 I was a Visiting Research Fellow at the American Institute for Economic Research.
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