© Reuters. Pushed in crypto – what happens next?
Cryptocurrencies are everywhere, with digital assets from DeFi to NFTs becoming increasingly popular over the past few years.
The entire crypto space has become an integral part of the fabric of society, with blockchain and distributed ledger technologies now powering entire industries and supply chains. Cryptocurrency is now more than just — and some enthusiasts are starting to get paid in crypto.
Celebrities and athletes, including Odell Beckahm Jr. From the NFL and Golden State Warriors players from the NBA, to the mayors of Miami and New York, get paid in bitcoin or cryptocurrency.
Tech giants like Microsoft (NASDAQ:) and Tesla (NASDAQ:) are already accepting bitcoin and other (like) cryptocurrencies as payment for goods and services.
Similarly, freelancers have moved to accepting stablecoins like USDC and USDT for payment, while some smaller companies and native companies are now offering cryptocurrency salaries as well.
Recent statistics from Australia show that the majority of cryptocurrency investors are under the age of 35, with nearly one in ten people within this age group holding cryptocurrencies within their portfolios.
So, while getting paid with cryptocurrency may seem exciting and reasonably straightforward, some important implications are worth considering before you get started.
How regulated are cryptocurrencies?
Cryptocurrency regulation is increasing globally as authorities seek to tailor their policy response to this new asset class. As cryptocurrency adoption grows, regulators will release their policy approaches in the coming months and years. One of the areas of regulation that has moved quickly in this area is taxation – against the background of large investor profits in recent years, cryptocurrency gains are being taxed in many countries of the world.
Countries have adopted different approaches, with Singapore and Germany welcoming crypto companies, while China has imposed a ban on cryptocurrency mining.
While some cryptocurrency participants believe regulation goes against the ‘decentralization’ mantra, others, such as institutional bitcoin proponent Michael Saylor (former CEO of MicroStrategy), have encouraged regulatory involvement to avoid misleading retail participants or losing their money.
Cryptocurrency adoption has also come from nation states, with El Salvador legalizing Bitcoin as the national currency and legal tender within the Central American country.
How are taxes paid in cryptocurrencies?
With the increasing appetite for cryptocurrencies, there are many tax implications that investors and companies who interact with the crypto ecosystem must consider. Depending on where you live, tax offices generally look at paying in cryptocurrency similarly to paying with fiat currencies.
In many jurisdictions, including the UK and Australia, your crypto salary will likely be considered income by your local tax office and, as such, will normally be subject to income tax at the usual income tax rate for your tax bracket. The tax you will pay is generally calculated as the fair market value of the cryptocurrency on the day you receive it.
For example, if you receive fixed coins (usually 1:1 pegged to the value of a fiat currency such as the US dollar), calculating this should not be too difficult. The total amount of USDC, USDT, DAI, or another selected stablecoin can be easily distinguished as the value of the total amount of tokens you received – ie $2,000 = $2,000.
On the other hand, if you prefer to be paid in a cryptocurrency like Bitcoin, or another cryptocurrency, you will have to calculate the value of your income on the day you sent the cryptocurrency. For example, if you receive 0.1 bitcoins as your monthly payment, it will be calculated as the fair market value (say $2,000). In this scenario, you will need to pay income tax at the usual income tax rate.
While you received the same amount in both scenarios, $2,000, there may be other implications if you are paid in bitcoin, as the price will likely fluctuate after the payment.
What if your cipher value changes?
Calculating the tax you owe on your income may seem simple at first. However, you are likely to hold on to crypto assets after the day you pay. For example, if you sell, swap, or spend this crypto, you will need to take into account any capital gains tax (CGT) obligations. Again, this depends on whether your country has a CGT system, as some countries, such as Singapore, do not.
If the CGT is applied, then a few months after you receive 0.1 BTC as your monthly payment, you will see that the value of your 0.1 BTC is now 3000 USD, so you decide to sell it now in USD. Initially, you owed income tax on a salary of $2,000 (a value of 0.1 bitcoin on the day you received it), but in addition to that, you will also make capital gains from the additional $1,000 gains you made.
To calculate your CGT liability, subtract your cost basis (the price of the asset on the day you received it + any fees related to its disposal) from the price at which you sold the asset. In this case, $3,000 – $2,000 = $1,000. The way these capital gains are taxed varies by country and how much you earn. If you find yourself winning cryptocurrency and trading frequently, it is important to seek advice from a qualified accountant or tax advisor.
Can I lose my cryptocurrency earnings?
The blockchain technology that supports cryptocurrencies means that transaction data is immutable or immutable. This means that if you lose the private key to your wallet that holds your crypto tokens, your earnings (and any other digital assets within your wallet) may be lost forever.
This may sound intimidating, but there are plenty of alternatives, such as using exchange wallets, setting up a hot or cold storage wallet, a software wallet on your phone or a hardware wallet using Ledger or Trezor.
All in all, should I get paid in cryptocurrency?
There are pros and cons to getting paid in cryptocurrencies. So, there is no easy answer to this question. Before making any decisions, it is essential to understand the risks and to seek advice from a qualified professional when necessary.
More and more people are realizing that cryptography and the blockchain technology that underpins it can open up opportunities for employees around the world. However, cryptocurrencies are a volatile asset class and ensure that you understand how the cryptocurrencies you receive are held, stored, exchanged and sold as your salary is critical. It is important to consider your investment strategy when choosing to earn or buy cryptocurrencies, and always do your research!
You can also use useful tools to calculate crypto taxes – which can save you valuable time by leveling all your belongings and generate a tax report compatible with your tax office in minutes.