Paying Employees in Cryptocurrency Is Risky for Workers

 

By Katie Nadworny October 17, 2019
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​Some companies around the world are offering to pay their employees in cryptocurrencies, a controversial and complicated choice that can cause problems for workers. Though employees of crypto companies are often enthusiastic about the alternative currency payments, the volatile nature of cryptocurrencies and the unclear tax laws that govern the assets point to potential headaches down the line.

Cryptocurrencies are decentralized digital assets, like bitcoin, that make use of blockchain technology. The decentralized nature of cryptocurrencies allows for greater privacy and independence from overseeing bodies, but also leads to volatile and fluctuating value within the cryptocurrencies.

"Most of the people who pay in cryptocurrencies are organizations that are creating the cryptocurrency themselves; therefore, it costs them very little to make the payments," said Geraint Jones, private client partner at the London-based firm BKL. But Jones said there has been a notable increase in companies choosing to use this payment method.

"It's becoming more common. Obviously, the employer needs to have cheap and easy access to the cryptos. If they're involved in the creation of the crypto in the first place, it's dirt cheap for them, because they can carve out a big lump of these cryptos for themselves and then use it as a salary and payment mechanism, and it cuts their cost quite dramatically."

Philipp Mattheis, Istanbul-based co-author of Kryptopia (Nicolai Publishing & Intelligence, 2018), a book about bitcoin, blockchain and the future of cryptocurrencies, agreed. "If you have a [cryptocurrency] startup, you create your own coin, so it's basically like paying your own employees with shares of your company."

However easy it might be for small cryptocurrency companies to compensate workers this way, employees are taking a gamble when they receive payments in crypto. "It's cheaper for the employer, but for the employee or for the contractor, there's a degree of risk," Jones noted. He recalled a client who received $10,000 a month in cryptocurrency, which was calculated based on the moving average of the price in the five days leading up to his payday. "He's taking a risk from the date he's paid, because obviously the market could crash the following day," Jones said.

Tax Issues

Taxing cryptocurrency is complicated because of the lack of laws or regulations addressing whether the currency should even be taxed.

"This is a global issue. There are a lot of issues surrounding where the employer is located, whether they have a presence in the U.K." said Jones, who is located in the U.K. and most familiar with cryptocurrency there.

"What is the status of a crypto token? Where is it regarded as located? … Is it located on a server somewhere? Is it located at the exchange from which it was purchased? Is it located based on the organization that originally issued it?" Jones asked.

In the U.K., these questions haven't yet been resolved by Her Majesty's Revenue and Customs (HMRC) or any legislative body. This affects cryptocurrency holders' ability to receive appropriate information about how their assets will be taxed.

"There's no system in place at all," Jones said. "HMRC has always said they don't need to have tax legislation specific to crypto because existing legislation is sufficient to cover all eventualities."

Nonetheless, Sean Rolland, director of product at BitPay in Atlanta, said there are cross-border benefits to cryptocurrencies. "Cryptocurrency represents a ubiquitous payment method that can be used by companies and workers regardless of their location across the globe," he said. "The cost, time and regulatory burden of transacting globally can be dramatically simplified when the payer and payee transact with one common payment method and blockchain payment methods are used."

What is clear, at least in the U.K., is that a capital gains tax must be paid on cryptocurrency. Because cryptocurrency is an unstable asset, however, the asset holders who are not careful or are prone to risky investments might find themselves saddled with a capital gains tax they are incapable of paying. Jones has encountered people in this situation. "For some people it can be a very major problem, because some people have made millions, and they've potentially lost millions," Jones said.

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Bitcoin

One cryptocurrency that is used to pay salaries less frequently is also the most popular among investors: bitcoin. "As far as I know, [companies] would not pay their employees in bitcoin," Mattheis said. "If they would do that, they first have to acquire the bitcoin somewhere. It doesn't really make sense."

Jones said that payments in bitcoin aren't realistic for most companies. "I haven't seen someone paid in bitcoin, because unless the person paying pre-mined a big load of bitcoin, they'd have to purchase the bitcoin, which would just be a pain in the neck."

However, some exchanges won't accept more obscure cryptocurrencies and require people to convert them into bitcoin before they exchange their crypto into traditional currency.

Katie Nadworny is a freelance writer in Istanbul. 

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