Pros and Cons of Paying Employees in Cryptocurrency
Paying employees in cryptocurrency has several potential advantages and disadvantages.
Pros
- 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.
Cons
- 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.
For Employees
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.
For Employers
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.
Final Thoughts
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.