Get paid in cryptocurrency? How it will be taxed and how to manage crypto risks
As the specter of recession looms, corporate America is becoming increasingly cautious about increasing headcount in their organizations. However, because the work still needs to be done, according to a study by Bloomberg, more than 75% of American companies prefer to hire freelancers during times of economic uncertainty.
According to a recent survey conducted by Humans.net – a US-based company – around a third of freelancers would like to receive their payments in cryptocurrencies. Some the whole package and some part of their salary package.
“With over 75% of businesses in the United States looking to hire freelancers, the global demand for freelancers is only expected to increase in the coming years. Of these freelancers, one in three would like to be paid in crypto, especially as crypto prices have fallen, making the current market situation an opportune time to invest in digital assets. Businesses are happy to compel and provide their payments in cryptocurrency, especially in an effort to attract young talent,” said Slava Demchuk, CEO of AMLBot, an anti-money laundering service based in UK and the first crypto wallet with AML module AMLSafe.
“Many hard-working people are turning to freelancing to earn extra money just to get by as inflation rates continue to climb. What’s devastating is how much these people risk to be cheated out of their earnings because they are unaware of the dangers of not validating the payer’s wallet,” he added.
So, if you are looking for freelance jobs in international companies, you can also get paid in cryptocurrencies and face the associated risks.
Although cryptocurrencies are a fast and hassle-free international payment method with no hidden commissions and you don’t have to worry about exchange rates among other benefits, the alarming growth of “dirty” crypto creates a dilemma for the independents.
“About 40% of BTC transactions are illegal. If you are a freelancer, receiving dirty crypto can put you at risk and get your account banned,” Demchuk said.
So, in addition to dealing with fluctuations in crypto values on trading platforms, you will need to manage crypto risks to protect your fund.
“A Payer may look trustworthy at first glance, but a Freelancer could easily get scammed without having time to validate their wallet. All you can see is the crypto payment in your account. But the process behind every transaction involves a complex verification process, and the network can block your wallet if it detects too many suspicious transactions,” Demchuk said.
“Anyone could unknowingly receive illicit funds, such as drug money, in their account without even knowing it. Everything seems to be going well at first until their accounts are frozen or banned without explanation. So even if you completely trust the person paying you, they may unknowingly put you at risk. The only way to protect yourself is to validate every transaction or wallet using a dedicated service – that’s basic crypto hygiene,” he added.
According to Demchuk, you can manage risk in the following ways:
Dirty crypto can come from a number of sources, such as:
- cryptographic hijacking attacks or “cryptojacking”
- criminal activities like money laundering, scams, ransoms or fraud
- unregulated exchanges and black market transactions
Top tips to protect yourself from crypto scams:
- Check incoming transactions: Check the sender’s wallet and each incoming transaction to make sure they are legitimate. Before receiving payment, use anti-money laundering screening services to ensure it is from a trusted source.
- Choose a secure crypto wallet: Consider security features such as multi-signature authentication, two-factor authentication (2FA), and built-in AML filtering features.
- Choose a secure crypto exchange: Trade crypto only on exchanges that require Know Your Customer (KYC) verification.
- Remember to have several wallets: Create one for your trusted contacts and another for high-risk or unknown contacts. This will help you keep your funds safe and minimize your risk in case you receive dirty crypto on one of your wallets.
Crypto dirty already received. What do I do now?
- Inform the payer: It is possible that they do not know the origin of their funds.
- Never receive other transactions from the same wallet: It’s obvious. The risk of being scammed is higher if you continue to receive payments from the same source.
- Verify all future transactions: Be extremely careful when processing future payments. While you could get away with only receiving one payment of dirty crypto, the more unusual or suspicious the activity on your account, the more likely you are to get caught or banned.
- Try challenging: If your account was banned or blocked by an exchange, you can try to challenge the decision if you can prove that no fraudulent activity took place.
- Seek professional help: Seek help from companies that offer crypto dispute resolution services and investigations, but do your best not to find yourself in this situation in the first place.
“If you believe you have received ‘dirty crypto’, take immediate action to protect yourself and your funds. First, let the payer know they may have been scammed and ask them to ‘stop sending further payments. If your account is banned or blocked, you can appeal if you can prove that no illegal activity took place. If necessary, seek professional help from companies providing dispute resolution solutions and crypto investigations. Going forward, be very careful when dealing with future payments and check all transactions for suspicious activity,” Demchuk said.
Taxation
As there is no clear status of cryptocurrencies in India, so are the tax rules.
So if someone is paid for their work in crypto, will it be treated as their income or investment for tax purposes? And how will it be taxed?
“Tax laws relating to cryptocurrency may vary by country. For example, taxpayers in the United States must report all crypto sales, conversions, payments, and income to the IRS and state tax authorities (if applicable), but each action has different tax implications,” Demchuk said.
“Receiving payment in cryptocurrency, exchanging goods or services for cryptocurrency, mining cryptocurrency, or earning rewards through staking are all considered taxable income. Since they are considered “earned” income, they are subject to both federal and state taxes. As such, you should record the value of the crypto in US dollars when you received it and include it in your gross income on your tax return,” he added.
Regarding US tax rules, Demchuk said, “Selling cryptocurrencies for cash, converting one cryptocurrency to another, and spending cryptocurrencies on goods or services are all earning capital. Depending on your tax bracket, they are taxed at 0%, 15% or 20%.
“However, there are also non-taxable events, such as buying crypto using cash and holding, donating crypto to charity or non-profit, receiving or making a gift, or moving your crypto from one wallet or account to another that you own,” he added.
“The regulations are comparable in many countries, but a few do not tax crypto profits – or do so only partially. For example, these are Singapore and Switzerland, where the tax on capital gains tax is not applicable, or from Germany for assets held for more than one year,” Demchuk added.
However, in India, the Reserve Bank of India is in no mood to recognize crypto, for now the payment you receive in cryptocurrencies would not be treated as income.
But you have to pay taxes when you exchange the currency to convert it to rupee for your expenses. At this point, a question may arise about the sources of your cryptocurrencies.
In case the instances of payments for freelancing in cryptocurrencies increase, the government will not leave it untaxed and may also bring some regulations to tax the income.
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