Interest in and use of cryptocurrencies like Bitcoin continues to grow, despite its volatile valuation and a constantly shifting regulatory landscape. The possibilities of dramatic increases in value and the convenience of transacting in this digital asset are alluring, but there are significant risks in using cryptocurrency as part of employee compensation.
Cryptocurrency as Compensation
Cryptocurrency is a digital currency where transactions are verified by a decentralized system using cryptography instead of a centralized body like a bank. Today, there are more than 20,000 cryptocurrencies, including Bitcoin, which at its peak in November 2021 was worth $64,000. But this year’s downturn in the market has seen one Bitcoin plummet below $19,000, dropping more than 50% of its value. Adding to the risk, in 2021, hackers stole roughly $3.2 billion worth of cryptocurrency. An additional $600 million of Ethereum was stolen in March of this year off the Ronin Network platform. The FBI said the North Korea-run hacking team known as the Lazarus Group was responsible.
Despite the volatility, employees are increasingly asking for cryptocurrency as compensation, including high-profile NFL players Odell Beckham Jr., Aaron Rodgers, and Trevor Lawrence. CNBC reports that the majority of employees electing for payment in cryptocurrency are in the 18-42-year-old age range. Reasons include the convenience of instant payment, the younger generation’s tolerance for risk, the possibility of avoiding taxes, and the perception that being paid in cryptocurrency is modern and trendy.
For executives interested in including cryptocurrency as part of a compensation package, it comes down to risk tolerance. Taking a portion of a total compensation package as cryptocurrency, for example, a bonus payment could be part of a prudent strategy.
The Regulatory Landscape of Cryptocurrency
The legal and tax implications of using cryptocurrency as compensation are important to consider, both by the employer and employee. For example, according to the federal Fair Labor Standards Act, non-exempt (hourly) employees must be paid in “cash or negotiable instrument,” which excludes cryptocurrency. Employers must pay exempt (salaried) employees a minimum of about $35,000 in cash; part of or all the excess can be paid in cryptocurrency. State laws on payment requirements vary, with some specifying “United States currency” as the method. The large fluctuations in cryptocurrency values can also complicate matters for payroll vendors.
Some may argue that cryptocurrency like Bitcoin could be categorized as a foreign currency, the Department of Labor (DOL) has not yet made that determination. For expatriates, it’s important to know other countries’ policies on cryptocurrency. El Salvador has added cryptocurrency as an official currency, while China has banned it. In addition, employers making international payments in cryptocurrency need to constantly monitor regulations in target countries to ensure they are in compliance.
The DOL has also issued guidelines that included its “serious concerns” about the risks of investing 401k funds in cryptocurrencies.
IRS Involvement
Perhaps the greatest issue with cryptocurrency as compensation lies in how the IRS categorizes it. In Notice 2014-21, the IRS stated, “For federal tax purposes, virtual currency is treated as property.” As such, any payment for property or services using cryptocurrency results in a capital gain or loss that must be reported on a tax return. For example, using Bitcoin to pay for groceries at Whole Foods or a latte at Starbucks—two of the vendors that now accept Bitcoin—is a capital gains transaction. The IRS requires keeping a record of the purchase for reporting on a tax return.
Cryptocurrencies Tomorrow
Someday, cryptocurrencies like Bitcoin may be as commonplace and stable as the dollar. For now, however, the level of risk and the complicated and ever-changing regulatory landscape suggest that both employers and employees do extensive research on the implications of using a digital currency as compensation.
Michael Callam is president of Gertsburg Licata’s Talent and M&A advisory groups. He can be reached at [email protected] or (216) 573-6000 x7003.
Gertsburg Licata is a full-service, strategic growth firm, specializing in business law, M&A advisory and executive talent solutions for entrepreneurs and executives of start-up and middle-market enterprises. Our proven process ensures time and resources are dedicated to identifying the goals of your organization and how your executive talent needs align with that vision. Our expert recruiters partner with you to build your dream management team, securing the best talent to help drive value for your employees and customers. Contact us today to discuss how we can help you secure your next competitive advantage.
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