From the U.S. government’s perspective, earning a salary in crypto is different from investing and selling crypto. This is because tax rates for income and investments are treated in distinct ways. The U.S. uses a graduated income tax where your tax rate goes up as your income goes up (ranging from 10 – 37%).
For long-term investments, you are taxed at a lower rate of 0%, 15%, or 20%; the long-term capital gains rate is also graduated and increases as your taxable income increases.
How Is a Crypto- or BTC-Denominated Salary Treated?
More and more people are choosing to receive some – or all – of their salary in bitcoin (BTC), ether (ETH), stablecoins, or some other cryptocurrency. Potential benefits to receiving a salary in crypto include efficient and cheap international remittances, potential crypto price appreciation, and being more insulated and independent from the traditional finance (TradFi) system of banks and financial institutions.
On the other hand, there are some other points to consider when deciding if a crypto salary is ideal for you — including how a salary denominated in BTC, ETH, or some other crypto will be taxed. The Internal Revenue Service (IRS) looks at the fair market value of your crypto salary in terms of U.S. dollars (USD) on the day you receive it when calculating payroll and income taxes. Let’s look at an example scenario.
Examining an ETH Crypto Salary (2022)
Dr. DeFi loves Ethereum and decides to receive 100% of his salary in ETH. They will receive the USD equivalent of $10,000 worth of ETH every month. With ETH’s price variability, the amount of ETH received each month could be substantially different while the valuation and cost basis in USD would be identical. For example, for the 2022 calendar year a $10,000 ETH payment could be less than 3 ETH (April 2022) or more than 10 ETH (June 2022) — over a threefold difference. At the end of the year, they would have an annual salary of $120,000 (minus any allowable deductions) from the IRS’ perspective.
Using historical data, the monthly salaries in ETH would be approximately: 3.00, 3.14, 3.82, 3.29, 4.66, 8.11, 8.11, 5.26, 6.80, 7.84, 7.99, and 7.90. This would equate to an annual salary of 69.92 ETH, with an average monthly ETH salary of 5.83 ETH. As you can see, there was a wide range in the amount of monthly ETH they received because the price of ETH experienced substantial volatility over the course of the year.
At the beginning of January 2023, this annual ETH salary would have been worth approximately $112,292.00 when converted back into USD. This would actually be less than the $120,000 they would have received in a standard USD-denominated salary, which would be an unrealized loss approaching $8,000. If sold at this point, it probably would have made more sense to have received an income that was paid in USD. But what if they waited to convert their ETH salary?
Scenario 1: Dr. DeFi HODLs His Salary and ETH Appreciates
In November 2021, the spot price of 1 ETH was trading at times for more than $4,800. They think ETH will rebound and they decide they want to wait to convert their ETH salary into USD until it hits this price point again. Let’s say that ETH hits $4,800 in March 2024 and they convert their entire 2022 salary. At this benchmark ETH price, the salary of approximately 70 ETH would be worth over $335,000. The USD cost basis of their salary was $120,000 so you may be wondering how this differential is treated.
In this case, the approximate differential (335,000-120,000) equates to a net gain of $215,000 over the original salary valuation. While the salary itself is considered taxable income, this net gain is considered investment income. At their salary, they would likely be taxed at 15% for the additional $215,000 (depending on their tax bracket). The original salary ($120,000) would probably have been taxed at 24% of their income (provided no investment sales placed them in a higher tax bracket).
Speaking of their 2022 income tax bill, in this scenario, the 2022 ETH salary wasn’t converted until 2024. Despite not being sold until 2024, they would still owe income taxes in April 2023. For this reason, they would need some other way to pay their 2022 income taxes. They could pay their taxes with cash savings; they would also have the option of selling other investments. They could even sell ETH they already had held for over a year to benefit from the long-term capital gains rate. But what would happen if they didn’t hold (or HODL) and converted their salary at an earlier date?
Scenario 2: Dr. DeFi Converts His ETH Salary
Dr. DeFi realizes that while they don’t need their 2022 ETH salary to pay the monthly bills, they will need to sell some to pay their income taxes. In our alternative situation, they would actually be able to claim capital losses as their salary is now worth approximately $8,000 less than it would have been in USD terms. While this has some tax-loss harvesting upsides, it is probably not ideal.
Now, let’s change the past and pretend that Dr. DeFi’s ETH was not worth $112,000 in Jan 2023 and was instead worth $150,000 — equating to a net gain of $30,000 over the USD-denominated salary of $120,000. In this case, they would be paying income taxes plus capital gains on the positive price differential. However, in this case, they’d be paying short-term capital gains that are taxed at a higher rate — and not the long-term capital gains they were able to pay in Scenario 1.
Other Crypto Salary Options To Consider
In our scenarios above, Dr. DeFi received 100% of their salary in crypto. Receiving a full salary in crypto could be great if you want to hold onto this crypto long term (at least a year) and have other means of paying your annual income taxes and other expenses. If not, or if this seems like a crypto step too far, there is a middle ground; you can simply choose to receive part of your salary in crypto.
Taking a partial crypto salary while receiving the balance of your paycheck in USD could be a good solution. For example, you could take 5-50% of your paycheck in crypto — while still having fiat currency (in this case USD) that can be used to pay your living expenses and taxes. Doing this could save you some intermediate steps in a few ways. If you already wanted to buy crypto anyways, this saves you the trouble of having to buy it — it’s already part of your salary. If you still need fiat to pay for stuff, you don’t have to go through the trouble of cashing out a portion of your full crypto salary for USD — it’s already part of your salary.
Self-Employment and Crypto Salaries
Employers are increasingly offering crypto-denominated salaries as a perk to attract the talent they seek. However, if you work as a freelancer or as an independent contractor you’ll likely have to pay additional taxes. On top of an income tax, you’d have to pay a self-employment tax. This tax is treated the same whether you are receiving a standard fiat salary or a crypto salary (minus the implications of a crypto portion appreciating or depreciating when converted to USD).
The Popularity of Crypto Salaries
Receiving crypto salaries is increasing in popularity and becoming more commonplace. If you’re considering receiving any percentage of your salary in crypto, it’s wise to consider the tax implications. Further, if you have been receiving a crypto salary but have been taxing it like an investment, you should start classifying it as income. It would also be prudent to file amended returns for past years for the crypto income you have received.
Beyond the tax issues, you should also weigh the pros and cons of a crypto salary — particularly when it would comprise a high percentage of your income. If the crypto’s value goes up, that’s obviously great. However, if the crypto’s value goes down precipitously, you’ll still owe taxes on the USD-value of your salary at the time of payment.
For example, if you got paid $100,000 in an altcoin that then dropped in value to $10,000 — you’d still owe income taxes on $100,000 (minus deductions and a capital loss allowance). If you didn’t have ample savings and investments, this could put you in the hole with a tax bill you may not be able to pay. Like crypto investing, taking a crypto salary comes with risk so you should consider both the downsides and upsides of taking crypto as a salary component.
- Your employer may give you the option to take some — or all — of your salary in BTC or another crypto.
- You will owe income taxes on a crypto salary (that must be paid in USD). You can’t treat a crypto salary as an investment.
- In addition to income taxes, you will owe either short- or long-term capital gains taxes on crypto salaries that appreciate in value when a taxable event is triggered, including: using your crypto salary to make a purchase, trading it for another crypto, or converting it to USD.
- You owe taxes on the amount of crypto you received based on its USD value on the date you received it. If the crypto’s value later goes down, this doesn’t lower your tax obligations.
Disclaimer: This crypto tax series is merely for informational purposes and should not be considered legal or tax advice. Please solicit the services of a crypto knowledgeable certified public accountant, tax professional, or lawyer should you need further guidance.