Are you getting paid in crypto? Make sure to do your tax homework

Are you getting paid in crypto? Make sure to do your tax homework

A well-known song advises, “The Times They Are A’ Changin’.”

This has always been so. The issues tend to be, what is it that is changing and how fast is it changing?

I have had jobs since I was 13 years old. This goes back some time. My jobs have changed, but the form of payment has not. I am, and have been, paid in cash.

Sure, now I can get a direct deposit to my bank account. Years ago, I either received a check or just got cash from delivering newspapers.

My generation has been willing to change from checks that we need to deposit to direct deposits by employers. We may even be proud of our ability to change with the times.

A recent survey reports that, for people born between 1980 and 1996, 36% would accept pay in cryptocurrencies. This rises to 51% for those born between 1997 and 2012.

Young people have always complained that the world doesn’t move as fast as they want. It turns out that this complaint applies to the form-of-payment world.

Labor Department 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 withholding (income, OASDI, and Medicare) to be remitted in cryptocurrencies.

Your employer’s retirement plan probably does not allow for contributions in cryptocurrencies. The same for paying your share of health insurance costs.

New York City Mayor Eric Adams made a splash with a claim that he would be paid in cryptocurrency. The city made him take cash.

Adams’ claim was, in part, a political ploy to “advertise” New York as the capital of the cryptocurrency industry.

Getting back to that legal stuff, federal law limits the form of payment of minimum wages and mandated overtime pay for covered employees.

There is no general prohibition on property payments for services. When not restricted by law, the tax law has long recognized that rules must exist for such things.

In 1969, Congress formalized the rules in a new Section 83. This said that employees have income equal to the fair value of property received for services.

Because property must be sold when the owner wants it converted to cash, the law also said that the property had a tax basis equal to its value at 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, there is $2,000 of gain recognized on that sale.

The $10,000 is subject to employment taxes. The $2,000 is not. Section 83 does not concern itself with what the property is.

Most of us tax people are used to the property being employer stock. For example, Elon Musk is said to have reported $23.5 billion of compensation in 2021 for Tesla stock received.

Musk probably owed a king’s ransom on that value. But, with a fair value tax basis, the stock could be sold to, oh, I don’t know, pay for a Twitter acquisition or whatever, with no further tax.

This means that the receipt of cryptocurrency is not a tax puzzler. Section 83 has it handled. The only issues are, first, value of the crypto, and, second, remitting withholding in cash.

But these problems have always existed in any Section 83 transaction. Again, we’re used to stock as the property. I once dealt with a manager who received title to an ice plant.

It’s not too unusual also to see a partnership interest or title to real estate as the property. So, even older tax people should be able to deal with cryptocurrency.

The question may be, can the young person wanting cryptocurrency deal with the tax issues? Do they understand that a later sale will be a separate reportable tax transaction?

Do they understand the need to separately deal with remitting employment taxes? In time, I suppose they will.

In the short run, employers will likely prefer to pay in cash and allow the employee, should they choose, to convert to crypto. In the future, we’ll see how quickly and broadly the times are changing.

James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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