Cryptocurrencies are everywhere, with digital assets from DeFi to NFTs becoming increasingly popular over the past few years.
The entire crypto space has become embedded in the fabric of society, with blockchain and distributed ledger technologies now powering entire industries and supply chains. Crypto is now much more than just Bitcoin - and some enthusiasts have even started receiving their salaries in crypto.
Celebrities and athletes, including Odell Beckahm Jr. from the NFL, Golden State Warriors players from the NBA, and even the Mayors of Miami and New York City, opted to receive their salaries in Bitcoin or crypto.
Tech giants like Microsoft (NASDAQ:MSFT) and Tesla (NASDAQ:TSLA) already accept Bitcoin and other cryptocurrencies (like Dogecoin) as payment for goods and services.
Similarly, freelancers have moved to accept stablecoins like USDC and USDT for payment, whilst some smaller companies and crypto-native firms now offer salaries in crypto too.
Recent statistics from Australia show that the majority of crypto investors are under 35 years of age, with approximately one-in-ten people within this age group holding crypto within their portfolios.
So while getting paid in crypto may appear exciting and reasonably straightforward, some important implications are worth considering before getting started.
How regulated are cryptocurrencies?
Countries have adopted various approaches, with Singapore and Germany welcoming crypto businesses, whereas China has imposed bans on crypto mining.
While some participants within the crypto space believe regulation to be against the mantra of ‘decentralization’, others, such as corporate Bitcoin proponent Michael Saylor (the former CEO of MicroStrategy), have encouraged regulatory involvement to avoid retail participants being misled or losing their funds.
Adoption of cryptocurrencies has also come from nation states, with El Salvador legalising Bitcoin as a national currency and legal tender within the Central American country.
How is being paid in crypto taxed?
In many jurisdictions, including the UK and Australia, your salary in crypto is likely considered as income by your local tax office and, as such, will usually be subject to Income Tax at your regular Income Tax rate for your tax bracket. The tax you will pay is generally calculated as the cryptocurrency's fair market value on the day you receive it.
For example, if you’re receiving stablecoins (usually 1:1 pegged against the value of a fiat currency like the US Dollar), this won’t be too hard to calculate. The total amount of USDC, USDT, DAI, or other selected stablecoin can be easily marked as the value of the total amount of tokens you received - i.e. 2,000 USDC = US$2,000.
On the other hand, if you prefer to be paid in a cryptocurrency such as Bitcoin, Ethereum, or another cryptocurrency, you’ll have to calculate the value of your income on the day you were sent the crypto. For example, if you received 0.1BTC as your monthly salary, this would be calculated as its fair market value (say US$2,000). In this scenario, you’ll need to pay Income Tax at your regular Income Tax rate.
While you received the same amount in both scenarios, US$2,000, there may be other implications if you were paid in Bitcoin, as the price will likely fluctuate after you’re paid.
What if your crypto’s value changes?
If CGT applies, if a few months after you received your 0.1BTC as your monthly salary, you see that the value of your 0.1BTC is now US$3,000, so you decide to now sell it for USD. Initially, you owed Income Tax on the salary of US$2,000 (the value of the 0.1BTC on the day you received it), but in addition, you’ll now also make Capital Gains on the further US$1,000 gain 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 disposing of it) from the price you sold the asset for. In this case, US$3,000 - US$2,000 = US$1,000. How you’re taxed on these capital gains will vary by country and how much you earn. If you find yourself earning crypto and trading frequently, it is important to seek advice from a qualified accountant or tax advisor.
Can I lose my crypto earnings?
This may sound scary, 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 a Ledger or Trezor.
All in all, should I get paid in crypto?
More and more people are realising that crypto and the blockchain technology underpinning it can open up opportunities for employees around the globe. However, cryptocurrencies are a volatile asset class and ensuring you understand how to hold, store, swap and sell the crypto you receive as your salary is crucial. It is important to consider your investment strategy when opting to earn or purchase crypto, and always do your research!
You can also use helpful tools to calculate your crypto taxes - which can save you valuable time by reconciling all your holdings and generating a tax report compliant with your tax office in minutes.