Cryptocurrency Compensation – How does it benefit your business?
This article will further explore salary in cryptocurrency, the benefits, and risks of cryptocurrency compensation.
Companies looking to differentiate themselves in the labor market while trying to save money on payroll transaction costs through financial intermediaries can consider incorporating cryptocurrency into their compensation programs. Many financial planners consider it could be included in a well-diversified investment portfolio, and customers have already begun to include it in their assets outside of company retirement plans. This article will further explore salary in cryptocurrency, the benefits, and risks of cryptocurrency compensation, and if cryptocurrency compensation as employee compensation is a good idea.
A growing number of businesses and some global brands are now accepting bitcoin as payment for their goods and services. Corporations are following suit by giving employees the option of receiving payment in bitcoin, either as a piece of their salary or as a bonus. Let us begin by understanding cryptocurrency compensation before we dig into the cryptocurrency compensation risks to contemplate if this plan is viable.
What is cryptocurrency compensation?
Cryptocurrencies are digital currencies that are produced and traded on a decentralized network connection. A cryptocurrency compensation scheme compensates employees by using digital currency, the most well-known and broadly used is bitcoin. Transactions involving digital currencies are maintained and recorded using blockchain technology, which keeps transactional information in blocks that are connected to create a chain. This recorded data is a decentralized and secured record of transactions.
Key things to know about cryptocurrency compensation
Cryptocurrency compensation, as opposed to traditional employee compensation, presents many of the same tax difficulties as employee compensation in corporate stock and, as a result, needs careful preparation on the side of both the business and the employee. Here are some cryptocurrency compensation pointers to know before leveraging crypto as a part of an employee compensation strategy:
- Tax basics – The Internal Revenue Service (IRS) stated that an employee who gets cryptocurrency compensation for their work will be given income tax withholding pay, which implies that crypto is includible in salaries at its price on the day the employee gets, or if subsequently, vests, in the cryptocurrency. According to tax legislation, the employee is taxable on the receipt of cryptocurrencies; not paying income withholding taxes is the employer’s problem.
- Vesting schedule – Employer stock that has been subject to vesting requirements becomes taxable whenever it matures at the stock’s value upon that vesting date. An employee, on the other hand, can choose a specific option so that the stock is taxed at the moment the worker receives it. In this manner, the individual can avoid paying taxes on the amount of the shares at the time of vesting. A similar scenario can work if an employee’s ownership of company crypto would have to fulfill vesting criteria.
- Form of payment – Since cryptocurrencies aren’t backed by any government, they don’t fit the Federal Fair Labor Standards Act’s (FLSA) definition of “cash or negotiable instrument” which says that minimum and overtime wages must be paid in “cash or negotiable instrument payable at par”. So, a company that chooses to pay salaries in cryptocurrency may violate the FLSA because they aren’t paying their workers in an accepted way.
- Deferred payment and option to purchase – Instead of giving the employee the cryptocurrency before it vests, an employer can give the employee the cryptocurrency when it vests. Under this method, the cryptocurrency is taxed at the same time that the employee receives it.
A forfeiture could lead to a capital loss equal to the difference between how much the employee paid for the cryptocurrency and how much the employer has to pay the employee because of the forfeiture. A drop in the value of the cryptocurrency could also lead to a capital loss. This is different from how the value of the cryptocurrency was treated as ordinary income when it was treated as wages.
Benefits of cryptocurrency compensation
While cryptocurrency compensation needs careful analysis in terms of tax implications, there are certain advantages when compared to traditional employee compensation:
- Digital compensation – Cryptocurrencies may only be interesting to a small group of people right now, but more and more millennials and zoomers are thinking about them. For business owners, there’s the extra advantage of standing out in a demanding profession, whether it’s through a company’s appeal to digital natives, approving crypto bonuses, or giving staff immediate cryptocurrency incentives if they’ve knocked their sales objectives.
- Instant transaction – Since the pandemic, more companies have started to look further afield and establish global teams that work in remote conditions. The perfect or most cost-effective expertise could be available in a country with a disturbed economy. Years of double-digit inflation make it hard for many employees all over the world to keep up with the cost of living. Because of how blockchain works, both domestic and international payments are usually settled right away. Professionals can get their pay on time and get it in their home country’s currency.
- Efficiency and transparency – Cryptocurrency compensation would also cut the time it takes to send a payment compared to an automated clearing house or a wire transfer to just a matter of a few minutes. Because of blockchain tech, both sides of a transaction recognize when the payments have been reviewed and obtained. This means that disputes over payments being held up by financial institutions are no longer an issue. Transactions are also easy to find without having to ask the other side for financial records or other details.
Risks involved in cryptocurrency compensation
Cryptocurrency compensation can provide an exciting value proposition and an opportunity to place companies on the leading edge for certain firms, such as startups and companies in the tech and media industries that are attracting digital natives or companies that have workforces in undeveloped nations. However, such a shift does not come without dangers for businesses and staff who want to engage in such transactions, especially in light of major regulatory uncertainty and massive fluctuations in the value of several popular cryptocurrencies. Here are some risks to consider:
- Volatility – In comparison to the relatively consistent value of a real currency, the price of cryptocurrencies fluctuates dramatically. As a result, they pose a balance-sheet hazard and are an uncertain means of paying wages and benefits. Bitcoin, for instance, dropped over 83% of its worth in May 2013. It further lost 50% of its worth in March 2020. Again it recently lost but then regained 16% of its power in a single day in February 2021 in around fifteen minutes. Such instability may give employers a tough time and, in certain cases, lead to unpaid wages and or violations of FLSA basic wage or overtime regulations. This could harm your company’s image as an employer.
- Tax and benefits – The IRS reckons digital currencies as “property” taxed at the premiums for capital gains. As per the guidance materials, every payment made to a person employed in crypto money should be disclosed on a Tax return relying on the currency’s value in U.S. dollars at the moment it was provided to the employee. Therefore, the Federal income tax, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax must be taken out of cryptocurrency wages. The Department of Labor (DOL) recently released guidelines saying that they have significant doubts about a fiduciary’s judgment to publicize pension plan participants to initiate investment opportunities in digital currencies or other items for which value is connected to cryptocurrencies. Given the risks, the DOL is likely to ask any financial institution that allows such investment opportunities how they will frame their actions with their duties of care and devotion.
- Legal risks for employers – Bitcoin and other cryptocurrencies are still not accepted as legal currency in most countries. There are also different rules about how they can be used from one country to the next. If you want to recognize cryptocurrency as compensation as a business, especially on a global level, you’ll have to do a lot of research. Some states have laws that say wages have to be compensated in US dollars, but even these rules are unclear. Employers who make the minimum or overtime payment with cryptocurrency compensation risk breaking the FLSA regulations because they aren’t paying workers in an accepted way. These are given reasons the employers face a mix of unknown and untested legal risks.
How to move forward with using cryptocurrency as compensation?
Before you can move forward with using cryptocurrency as a form of compensation for your employees, there are several considerations to take note of for both the company and employees:
- Consideration to follow for companies – Given the mix of unknown and unverified legal risks, employers should limit cryptocurrency compensation strategies for employee compensation to avoid violation of the FLSA regulations regarding minimum/overtime or hourly wages. For instance, a company would pay an exempt worker’s base salary in U.S. dollars with incentives in cryptocurrency. Employers must also keep up with the changing taxes and benefits regulations with cryptocurrency compensation, whether they engage in cryptocurrencies to pay salaries or use a third party to change US dollars into digital currencies. Lastly, the only fact that is certain about cryptocurrency compensation is that almost every decision to pay employees in virtual currency must be formed with a sharp watch on the distinctive salary, tax, and economic advantages issues that these transactions bring up.
- Consideration to follow for employees – As cryptocurrency compensation becomes more popular and known by the general public, employees can ask to invest in cryptocurrency if employers offer cryptocurrency compensation. The advice from the DOL makes it clear that people should be very careful, and employees should expect that cryptocurrencies will remain unstable. The traditionally risky asset has never been subjected to a test in a situation like the one we’re in now, where rates of interest are going to go up. Individuals should fully expect cryptos to dunk even more, so they only accept cryptocurrency compensation if they can’t risk losing if the digital currency goes down to zero. Experts said that before accepting cryptocurrency compensation, it’s important to have a safe economic state and a clear plan for how to invest.
Steps in establishing cryptocurrency compensation
After companies have thought about their risk management plans and decided they want to pay their employees with cryptocurrency but don’t know where to start, here’s a guide:
- Determine the number of potential employees – Find out how many of your existing employees would indeed be interested in testing where they would be paid in cryptocurrency. Get your talent teams involved in figuring out how interested potential recruits are in this.
- Use a third-party cryptocurrency payment vendor – As the initial step in your test program, use an independent cryptocurrency payment vendor to reduce a few of the risks that come with maintaining crypto on your balance sheets. Even though service charges ought to be significantly lower than those charged by banks, the expenses still vary between crypto vendors. Be aware that various states have different rules about how non-fiat money transactions can be made and that these rules may change over time. Native guidelines must be recognized and pursued so payroll taxes and reports are done correctly.
- Create and connect your account with a vendor – Set up an account with the vendor so you can figure out if it’s better for your company to link your billing system to the vendor’s system or to start transfers through a manual process with the vendor’s online platform.
- Discuss with employees and set up rules and regulations – Teach your employees and make sure they understand the rules and arrangements. When employees get paid in digital currencies that are considered property, they should also know how this affects their taxes. Confirm what digital currency they want and how much of their remuneration they should get in cryptocurrency. Employees can make their choices, save them, and alter them if they have a login with a vendor. One of the terms is that you agree to the exchange rate applicable at the time of compensation.
- Take into account all the tax considerations – The company will have to follow the rules for accounting and keep good records. Once these things are taken care of, the company can deduct the required taxes and start the payouts through the vendor. The employee’s virtual currency will be sent to their virtual wallet or custodial account.
Cryptocurrency in 401k plan
Fidelity declared in April it was going to allow the 23,000 companies that run their 401(k) programs on the Fidelity platform to add cryptocurrency as an acceptable investment option. Based on the issues raised above, the DOL has issued a strong warning to 401(k) program administrators. As crypto holdings gain popularity and general awareness, managers of 401(k) and similar arrangements could be asked about the possibility of crypto investments by members. Financial advisors contemplating adding cryptocurrency assets to 401(k) plans must evaluate in light of the DOL recommendations and continue only after balancing the risks of DOL inquiry and fiduciary lawsuit and recording the judgment process.
How can cryptocurrency be used for retirement plans?
Despite many pros and cons to evaluating cryptocurrency compensation, fiduciaries can still choose to include cryptocurrency in retirement plans with caution. Investing in crypto comes with a lot of risks, but there are also some good things about it. It could give you a diversified portfolio, which makes you less vulnerable to market changes. If you want to purchase and hold cryptocurrency in your retirement plan, it might be a good idea. But make sure to remember the following:
- Examine your financial strategy – Ensure that you comprehend your financial condition and plan your objectives. When you’ve got several years before retirement, adding cryptocurrencies to your pension plan could be a safe choice for you, but if you’re just got a few years before retirement, investing in cryptocurrencies might not even make sense. Any investment you contribute to your retirement plan must remain undisturbed until you retire.
- Recognize the potential risks – Cryptocurrency is a risky investment with frequent and abrupt price movements. As a result, you must be cautious about investing too much into it. When attempting to diversify your portfolio, avoid investing excessive amounts of your funds in one thing, even cryptocurrencies. Furthermore, when determining which cryptocurrency currencies to acquire, choose established, well-known brands like Ethereum or Bitcoin over emerging players.
- Avoid confirmation bias – Although it may appear that everyone is going into cryptocurrencies, it is not for everyone. All investment involves risk, and the most unpredictable assets can be explored if you put considerable thinking and research behind them.
Why should you choose Eqvista to value your crypto assets?
Eqvista can assist you if you seek legal assistance in allocating crypto assets to your staff. We can help you establish how much your digital assets are worth using Eqvista’s expert business valuation, which is a process for determining a firm’s economic value. A business valuation could be used to determine the worth of your firm, crypto holdings, revenue, and other criteria. Eqvista’s highly qualified valuation team can assist you in establishing the value of your tokens as well as the reasonable terms for allocating them to your employees. Obtaining value is now an essential aspect of expanding your organization. Get in contact with us to learn more about our valuation services.