Are you paid in crypto? Be sure to do your tax homework
A well-known song advises, “The Times They Are A’ Changin’.”
It has always been so. The issues tend to be, what is changing and how fast is it changing?
I’ve had jobs since I was 13. It goes back some time. My jobs have changed, but the form of payment has not changed. I am and was paid in cash.
Of course, I can now get a direct deposit to my bank account. Years ago, I either received a check or received money from delivering newspapers.
My generation was willing to switch from checks we have to deposit to direct deposits by employers. We can even be proud of our ability to evolve over time.
A recent survey reports that, for people born between 1980 and 1996, 36% would accept paying in cryptocurrencies. This figure rises to 51% for people born between 1997 and 2012.
Young people have always complained that the world is not changing as fast as they would like. It turns out that this complaint applies to the world of payment methods.
Department of Labor regulations interpreting federal law may prevent your employer from paying in a form other than cash. State labor law may say the same thing.
IRS rules do not allow payroll deductions (income, OASDI, and Medicare) to be remitted in cryptocurrencies.
Your employer’s pension plan probably doesn’t allow cryptocurrency contributions. The same applies to the payment of your part of the health insurance costs.
New York Mayor Eric Adams caused a stir when he claimed he would be paid in cryptocurrency. The city made him take money.
Adams’ assertion was, in part, a political ploy to “herald” New York as the capital of the cryptocurrency industry.
Going back to these legal issues, federal law limits the form of minimum wage payment and mandatory overtime pay for covered employees.
There is no general prohibition on ownership payments for services. Where not restricted by law, tax law has long recognized that rules must exist for such things.
In 1969, Congress formalized the rules in a new Section 83. This stated that employees had income equal to the fair value of property received for services.
Since the property must be sold when the owner wishes to convert it into cash, the law also stipulated that the property had a tax base equal to its value at the time of receipt.
This means that if an employee receives property valued at $10,000, he has income of $10,000. If that property is later sold for $12,000, a gain of $2,000 is recognized on that sale.
The $10,000 is subject to employment taxes. The $2,000 is not. Section 83 is not concerned with what is good.
Most of us tax professionals are used to property being employer stock. For example, Elon Musk reportedly declared $23.5 billion in compensation in 2021 for Tesla shares received.
Musk likely owed a royal ransom on that value. But, with a fair value tax basis, the shares could be sold to, oh, I don’t know, pay for a Twitter acquisition or whatever, without further tax.
This means that receiving cryptocurrency is not a tax headache. Section 83 deals with that. The only issues are, first, the value of the crypto and, second, the payment of the cash hold.
But these issues have always existed in any Section 83 transaction. Again, we’re used to storing like property. I once dealt with a manager who had received title to an ice cream factory.
It’s also not too unusual to see a partnership interest or real estate title like ownership. So even older tax professionals should be able to handle cryptocurrency.
The question may be, can the young cryptocurrency lover cope with tax issues? Do they understand that a subsequent sale will be a separate reportable tax transaction?
Do they understand the need to treat employment tax rebates separately? In time, I suspect they will.
In the short term, employers will probably prefer to pay in cash and allow the employee, if they wish, to convert to crypto. In the future, we will see how quickly and how much times change.
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]
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