Understanding Tax Implications of Crypto Payroll | Best Practices & Compliance

How Is Crypto Payroll Taxed?

One of the primary concerns for the company is the income tax treatment of cryptocurrencies and stablecoins. Tax authorities around the world are still grappling with the issue of how to classify these digital assets, and the tax treatment can vary depending on the country.

However, it is important to note that you should always defer to your national tax authorities for guidance - not any other regulatory body in the country. The tax treatment of cryptocurrencies is almost always independent of classifications by central banks or securities regulators! 

For instance, in the United States, the SEC may consider Ethereum a security, but the CFTC may consider it a commodity, while the IRS treats virtual currency as property for Federal income tax purposes. So remember to always defer to the right regulatory authority, even if they disagree among themselves.

Some countries have banned cryptocurrencies entirely, or placed restrictions on their use in payroll. So be sure to check that receiving income in crypto is legal in the country where you are a tax resident.

Crypto Income Tax. In general, most countries treat cryptocurrencies and stablecoins as property for tax purposes. That means that when an employee or contractor is paid in crypto, the value of the cryptocurrency or stablecoin at the time of payment is considered taxable income. 

The employee or contractor must report this income on their tax return and pay any other  applicable taxes that would apply to income received in any other form like cash.

Other forms of income tax may include withholding taxes, social contribution taxes, among others. This varies considerably by country, and even sometimes by state.

Crypto Capital Gains Tax. Depending on the capital gains taxes that apply, employees receiving income in other cryptocurrencies or stablecoins must report the capital gains or losses based on the difference between their cost basis, and fair market value at the time of disposal.

What Is a Taxable Event?

There are also differences in what constitutes a taxable event, even for employees who may be paid in crypto. For instance, in Hungary, a taxable event occurs only when the cryptocurrency is “off-ramped”, or converted into fiat currency. Crypto-to-crypto swaps, or even the point of receiving the crypto income in a crypto wallet does not constitute a taxable event.  

In other cases, employees or individuals  who receive cryptocurrencies or stablecoins as income must report them as ordinary income based on their fair market value at the time of receipt.

Reporting & Record Keeping Requirements

Companies must also ensure that it accurately reports all payments made in crypto to its employees and contractors. This includes reporting the value of the payment in the local currency, as well as any taxes withheld.

The company may also be required to file additional reports with local tax authorities, depending on the country. For example, in the United States, companies that pay independent contractors more than $600 in a year must file a Form 1099-MISC with the Internal Revenue Service (IRS).

Currency Exchange Rates: The company must also be aware of currency exchange rates when paying employees and contractors in crypto. The value of cryptocurrencies and stablecoins can be highly volatile, which can make it difficult to accurately calculate the value of payments.

To mitigate this risk, the company should consider using a third-party service that provides real-time exchange rates to ensure that it accurately calculates the value of payments.

Record-Keeping: Finally, the company must maintain accurate records of all payments made in crypto. This includes the value of the payment in both the local currency and the cryptocurrency or stablecoin used for the payment.

By using a software such as Request Finance, that can become a much simpler task, that will ensure you keep record of all payments and is able to easily retrieve that data whenever needed - for local tax authorities or audits. 

The company should keep these records for at least the minimum required time under local regulations. In the United States, for example, employers must keep payroll records for at least three years.

In conclusion, managing payroll in cryptocurrencies and stablecoins requires careful consideration of tax-related issues. The company must ensure that it complies with all applicable regulations, accurately reports all payments, and maintains accurate records. By taking these steps, the company can minimize its tax-related risks and ensure that it operates in compliance with local regulations.