Cryptocurrency is hot right now. Bitcoin has seen enormous gains in value (often followed by huge drops), and experts predict the price of one Bitcoin will eventually hit $100,000.
With everyone from experienced investors to high school kids getting in on the action, lawmakers are struggling to keep up with regulations to protect investors and ensure people are paying their share of taxes on cryptocurrency gains.
At some point, every small business could field questions from applicants and employees about whether the company offers cryptocurrency as a compensation option. Some of your competitors may already be paying employees in crypto. So, should you?
To answer that question, let’s get clear on exactly what cryptocurrency is, the pros and cons of using it as a form of payment of wages, and best practices for employers.
What is Cryptocurrency?
Cryptocurrency is any type of digital currency. Cryptocurrency doesn’t rely on banks to verify transactions. Instead, it’s a peer-to-peer system that allows anyone anywhere to send and receive payments.
When you transfer cryptocurrency, the transaction is recorded in a public ledger known as a blockchain.
Bitcoin was the first cryptocurrency, but it’s far from the only one. As of May 2022, there are over 19,000 cryptocurrencies, with more entering the market daily. Other than Bitcoin, some of the most well-known cryptocurrencies include Ethereum, Litecoin, and Ripple.
Can You Pay Employees in Cryptocurrency?
The federal Fair Labor Standards Act (FLSA) requires employers to pay regular and overtime wages in “cash or negotiable instrument.” Historically, this has been interpreted to include only fiat currency—money backed by a governmental authority. So paying minimum and overtime wages for non-exempt employees and minimum weekly salaries for exempt employees in cryptocurrency could violate the FLSA.
It’s important to note that the FLSA’s requirements only apply to wage, salary and overtime payments. So you may be able to pay at least regular wages in U.S. dollars and pay compensation beyond that threshold in crypto.
The U.S. Department of Labor (DOL) has allowed businesses to pay employees in foreign currency as long as the amounts paid meet FLSA requirements when converted to U.S. currency using the exchange rate that applies when the payment is made. However, it’s not clear that the DOL or the courts will treat cryptocurrency like a foreign currency if a dispute arises.
State Labor Laws and Cryptocurrency Payments
However, state employment laws can complicate the situation. For example, in New York, employers can only pay wages in cash, check, direct deposit, or payroll debit card. Other states specifically require wages to be paid in U.S. dollars.
California law prohibits employers from paying wages that aren’t “payable in cash, on-demand, without discount.” Big fluctuations in the price of Bitcoin and other cryptocurrencies are common, so crypto-compensation could lead to violating state law.
For example, say your employee is set to receive their paycheck in Ethereum, but the price of Ethereum drops between the date you submit payroll for processing and the date the employee receives payment. Such a situation could violate employment laws and lead to claims of unpaid wages.
How to Pay Employees in Cryptocurrency
If you decide to pay employees in crypto, here are a few best practices to consider:
- Get written authorization from employees. While not strictly required, it’s good to get written permission from employees confirming that they wish to receive part of their salary in cryptocurrency and acknowledging its risks. Work with your HR team, legal department, or attorney to draft the authorization form.
- Use a third-party vendor. Rather than buying cryptocurrency and holding it until it’s time to pay employees, consider partnering with a third-party vendor. These service providers can convert U.S. dollars into cryptocurrency at the current rate and transfer the payment to the employee’s digital wallet.
- Pay minimum wages and overtime in U.S. dollars. To avoid trouble with the U.S. Department of Labor, pay regular wages and overtime in U.S. dollars. Then you can pay bonuses and other incentive payments in cryptocurrency.
- Don’t forget about taxes. Paying employees in cryptocurrency doesn’t get you or your employees out of paying payroll taxes. The IRS still expects you to withhold income taxes and FICA on any amounts you pay to employees. Employees will owe income taxes on the fair market value of the cryptocurrency when they receive it and owe capital gains later if they sell the crypto after it’s increased in value.
Pros and Cons of Paying Employees in Cryptocurrency
There are several potential advantages and disadvantages to paying employees in cryptocurrency.
- Speed. Cryptocurrency transactions can be settled almost instantaneously. Employees don’t have to wait days for a bank to make the funds available in their bank accounts.
- Hiring incentives. Employees—especially those who are young, tech-savvy, and already understand and use crypto—may be drawn to companies that pay employees in cryptocurrency. This could give your business an edge in recruiting and hiring.
- Potential gains. One of the defining features of cryptocurrency is volatility. For example, on December 7, 2017, the price of one Bitcoin jumped from $16,000 to $20,000 in one day. As a result, employees could potentially realize huge gains if the value of their crypto rises quickly after payday.
- Compliance. Laws around cryptocurrency and its use vary widely and are evolving. This makes it challenging to ensure you comply with federal and state laws.
- Potential losses. Just as cryptocurrency can gain value quickly, it can lose value just as fast. For example, after breaking records in 2017, the price of one Bitcoin dropped from $20,000 to below $12,000 on December 27, 2017. So employees could suffer major losses if the value of their crypto drops suddenly after payday.
- Lack of legal protection. Decentralization and lack of government oversight in the cryptocurrency space make it attractive to scammers. It also means that crypto owners don’t have the same consumer protections as other forms of payment. For example, if you inadvertently overpaid an employee via direct deposit, your payroll processor can usually reverse the transaction and get your money back. However, once you pay with cryptocurrency, you can usually only get your money back if the person you paid sends it back.
Paying Employees in Cryptocurrency FAQs
Is it legal to pay employees in cryptocurrency?
It’s legal to pay employees in Bitcoin and other forms of cryptocurrency in some countries, while other countries have bans against it. In the U.S., the rules are still evolving. However, to avoid violating the Fair Labor Standards Act, employers should pay minimum wages, overtime pay for non-exempt employees, and minimum weekly salaries for exempt employees via traditional means. Bonuses and other incentive compensation can be paid in cryptocurrency.
Check state law to ensure paying employees in crypto won’t violate state law since some states require wages to be paid in U.S. currency.
What happens if I get paid in crypto?
When you receive cryptocurrency as payment, it’s taxable income and taxed at your ordinary income tax bracket.
The IRS treats cryptocurrency like property rather than currency, so if you later spend, sell, or exchange that cryptocurrency, you may have to pay capital gains tax on the transaction. For example, say you receive $1,000 worth of Litecoin as a work bonus. Eighteen months later, the Litecoin is worth $1,500 and you decide to sell it. You would have a long-term capital gain of $500 ($1,500 selling price minus your $1,000 basis) and would have to report the transaction on your federal income tax return.
On the other hand, if the value of the Litecoin fell to $500 before you sold it, you would have a $500 short-term capital loss. You could use that loss to offset other short-term capital gains and reduce your overall taxable income.
Why would an employer want to pay a worker in cryptocurrency?
For some employers, paying employees in crypto is a way to attract talent. Competition for smart and talented employees is fierce—especially in the tech industry. By offering to pay part of employee salary or bonuses in crypto, companies can establish themselves as progressive employers that offer compelling compensation and benefits.
Crypto-compensation can also be convenient for paying employees in foreign countries, as the transaction fees can be much lower than those charged by a bank or other financial intermediary.
Be Smart about Cyrpto
The use of cryptocurrency as compensation is relatively new, so it will take some time before it’s a reliable, safe, and well-understood business practice. As more companies look at cryptocurrency as a payment option, the process will gain legitimacy and regulatory guidance will evolve.
In the meantime, the decision to compensate workers with crypto shouldn’t be taken lightly. There are many potential legal issues to consider, so be sure to discuss them with your attorney and tax advisor.