What is crypto payroll

Crypto payroll is the use of cryptocurrencies as a means of payment of employee wages.

Bitcoin is the most popular option for cryptocurrency payroll, but it’s not the only option. Coins range from established names like Ethereum (ETH) and Litecoin (LTC) to rapidly growing ones like Solana (SOL) and Cardano (ADA). Crypto is still new, so obscure coins may emerge and overtake today’s currencies.

What are the advantages of crypto payroll?

Getting paid in bitcoin appeals to workers and companies with global workforces because cryptocurrency transactions are near-instant and have low transaction fees. Advantages include:

It’s fast: Cryptocurrency’s most significant benefit is speed: transactions settle almost instantly, compared to traditional banking systems that use SWIFT transactions, which can take weeks.

It’s direct: Crypto transactions take place on a peer-to-peer network without an intermediary financial institution. If I send you bitcoin, it goes directly to you. Thanks to the peer-to-peer structure, all bitcoin transactions are permanent, visible, and secure.

It’s decentralized: Crypto’s peer-to-peer network sidesteps centralized authorities that control the supply of traditional currency, like banks and governments. In other words, crypto’s value is independent of government or financial institutions. 

It’s an investment: Unlike traditional fiat payments, crypto has the potential to rise in value. Employees could end up collecting far more than their base salary if the value of crypto appreciates. (Of course, it also has the potential to depreciate over time, which we’ll discuss below.)

It’s enticing: Almost nine in ten American adults have heard of crypto, and about 40% of American millennials own digital assets. For that reason, many employees, independent contractors, and freelancers now pursue crypto payments. A signing bonus paid in crypto could make for an attractive offer. At the same time, flexible payment options like crypto withdrawals might make some organizations—such as startups and those in the tech and media sectors recruiting digital natives—stand out from their competitors and attract talent.

What are the disadvantages of crypto payroll?

Cryptocurrency is still finding its place in financial and governance systems, so it’s prone to volatility and limited in many areas. Disadvantages include:

It’s volatile: Cryptocurrencies are volatile. Bitcoin alone sees significant price surges and plummets in the span of only a few months. This volatility makes bitcoin an unreliable basis for wages and fringe benefits. Employees could potentially walk away with less than their base salary by accepting payments in crypto.

It has a suspicious reputation: Crypto user addresses are pseudonymous, so crypto is often associated with illicit activities such as money laundering. As a result, companies may refuse to participate in the bitcoin network to avoid reputational risk.

It’s not globally accepted: Varied cryptocurrency regulations across countries make it difficult to establish crypto payroll services on a global scale. Countries use inconsistent terminology to describe crypto, have unique rules and tax treatments, and change regulations often. For instance, the language to describe bitcoin and other cryptocurrencies might be “digital currency,” “virtual commodity,” “payment token,” “cyber currency,” or “crypto assets.”

Inconsistent verbiage adds complexity to international transactions that must comply with financial regulations, like wage payments.

It’s not integrated with existing systems: It’s challenging to tie bitcoin to existing legal money flows. The vast majority of banks don’t support crypto—it’s impossible to send bitcoin through your local bank, for example. Although crypto-based systems (decentralized finance) are growing, existing financial systems like credit cards and loans don’t work with crypto, limiting usability.

Is it legal to pay wages in crypto?

Even in countries where Bitcoin is legal, it may not be legal to pay employees in Bitcoin—at least directly. Many countries, including the US and Canada, require wage payments to be made in fiat currency to comply with labor standards. Because of this, it’s better to offer base pay in fiat currency and then partner with cryptocurrency exchange services like Coinbase or Bitwage that provide streamlined payroll solutions. These crypto exchange services can convert local currency into the crypto of the worker’s choosing using crypto accounting software.

Alternatively, stablecoins—virtual currencies backed by fiat—work well as a substitute because they combine the operational advantages of crypto with the price stability of bank-issued money. USDC, for example, is a US-dollar stablecoin: 1 USDC represents $1USD in assets stored off-chain.

How is crypto regulated?

In the most crypto-friendly regulatory landscapes, such as the US, bitcoin is a “money services business.” It falls under more stringent regulations and is taxed differently than traditional currency by the IRS. The IRS treats bitcoin as property for taxation purposes.

However, many other countries ban cryptocurrency altogether. As of November 2021, nine countries have an absolute ban on crypto, meaning owning or trading crypto is illegal. The nine countries with complete bans are:

• Algeria

• Bangladesh

• China

• Egypt

• Iraq

• Morocco

• Nepal

• Qatar

• Tunisia

42 countries have implicit bans on cryptocurrencies, meaning the government has placed restrictions on banks and financial institutions from dealing with crypto or offering services to crypto providers.

These broad restrictions currently make it impossible to offer a bitcoin wage on a global scale.

How is crypto taxed?

Cryptocurrencies are taxed differently from country to country. In the European Union, bitcoin is exempt from VAT (value-added tax) in light of a 2015 Court of Justice of the European Union ruling. They consider bitcoin “a supply of services.”

In Israel, bitcoin is a taxable asset. In Switzerland, it’s a foreign currency. Argentina and Spain treat it as income tax, while Denmark treats it as income tax with deductible losses. In the UK, on the other hand, corporations pay corporate tax, unincorporated businesses pay income tax, and individuals pay capital gains tax on crypto profits.

Accepting a salary in crypto would be treated like any other income for tax purposes. Companies must report payments in local currency for income tax purposes. Crypto could have additional tax appeal for high earners. In the US, profits from bitcoin have capital gains tax rates of 20%, which is lower than the current top income tax bracket of 37%.

Bitcoin’s dissonant tax regulations signal the difficulty of offering bitcoin salaries to employees. Payroll departments for international teams may struggle to track which regulations to follow when paying employee salaries.