Getting paid in cryptocurrency? Learn the tax laws

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Robin is the founder and CEO of Koinly (a bitcoin and cryptocurrency tax software) that helps Bitcoin investors calculate their taxes.

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With cryptocurrencies becoming increasingly popular around the world, some employers are now paying their employees with cryptocurrencies like bitcoin or ether. While the crypto industry itself has been paying salaries in digital currencies for years (Coinbase has been paying employee salaries in crypto since 2013), crypto payments are becoming more common.

For example, the Japanese firm GMO Internet Group has decided to offer its employees the possibility of receiving their salaries in crypto. In fact, there are platforms today that actually allow employers to make crypto salary payments.

Self-employment is another area where I see crypto payments more frequently, especially when it comes to international payments. Remote workers around the world, whether they are programmers, designers or content marketers, receive compensation through cryptocurrencies. Existing options can get very expensive, and bitcoin or ether payments are a relatively easy and cost-effective alternative.

Know the benefits and complications.

There are some things you should keep in mind if you are getting paid in crypto. There are natural benefits to receiving a portion of your income in crypto. This includes things like efficient and cost-effective transfers (especially for international payments), financial liberation from the traditional centralized financial system, and strong identity protection.

At the same time, there are some potential complications that you should keep in mind. For starters, it’s important to remember that cryptocurrencies can be quite volatile, and if their value depreciates sharply, your net worth can be affected. So it may be a good idea to make sure that you only receive part of your salary in crypto, or to consider selling part of it immediately after receiving it. On the other hand, you can choose to hold the currency if you are familiar with crypto trading and expect your crypto assets to appreciate.

Understand how taxes work.

If you are receiving your salary in crypto, you should also be aware of the tax implications and file your returns accordingly. To keep it simple, let’s say you are a freelance writer who wants to receive a payment worth $ 1,000 from a client in bitcoin. On the day of payment, if the value of bitcoin is $ 10,000, you will end up receiving 0.1 bitcoin.

Regarding taxation, the IRS says you will need to determine the difference between your adjusted base and the price you sell it at; you must declare this number on your taxes when you sell the currency. A lot of people don’t know how crypto taxes work and end up not reporting crypto income. However, the IRS is calling for stricter compliance with cryptocurrency requirements. So if you haven’t declared your crypto earnings, now is the time to start doing so. You can even file amended returns for income you received in the past.

One of the challenges with filing these returns is that you may not always remember the fair market value of the crypto you received. Uploading your data to crypto tax software can help you determine the value of crypto and file your returns accordingly.

Also, don’t forget the capital gains tax.

If you think your tax returns are sorted after you report the cryptocurrency income you received, think again. When it comes to the IRS, bitcoin and other cryptocurrencies fall under the category of goods. This basically means that when you sell cryptocurrency you have to pay capital gains on any profit you make.

If you’ve been holding the crypto for less than a year, you’ll need to pay short-term capital gains tax on profits. This profit is added to your total taxable income, and the amount you will have to pay in taxes will depend on the tax bracket to which you belong. If you hold the crypto for more than a year, you will end up paying a long-term capital gains tax, which can reach up to 20% of the profit.

Write off your capital losses.

Remember, if you sell cryptos at a loss, you can write off your losses to reduce your taxable income and therefore your tax burden. So remember to keep track of your losses and include them when you file your returns.

Receiving a portion of your earnings in cryptocurrency can seem extremely liberating, efficient, and profitable. However, keep your taxes in check to avoid unnecessary stress down the road.

The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

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