Are Crypto Salaries a Good Idea? Er, Probably Not

Top Class Actions’s website and social media posts use affiliate links. If you make a purchase using such links, we may receive a commission, but it will not result in any additional charges to you. Please review our Affiliate Link Disclosure for more information.

Cryptocurrencies are continuing to attract attention and popularity — and with it, crypto salaries are becoming less unheard of than they might have been in the past.

New York City Mayor Eric Adams, who just took office at the start of the new year, made headlines when he announced in a November tweet that he will “take” his first three paychecks in bitcoin.

He’s not the only local elected official to make such a statement — that tweet was in response to an earlier one from Miami Mayor Francis Suarez asserting that he would take his next paycheck in “100% bitcoin.”

As far back as 2014, rapper 50 Cent accepted 700 bitcoin for his album “Animal Ambition” — an amount that was worth around $460,000 at the time and, assuming he still has the bitcoin, would have massively appreciated to more than $26 million today.

And in November 2020, NFL player Russell Okung ended up in the news for claiming half his salary was being paid in bitcoin (according to the NFL, Okung’s pay was made in US dollars that he then converted to bitcoin himself). Regardless of the precise situation there, half his $13 million salary ending up in bitcoin form in 2020 would mean that portion was worth more than $21 million as of March 2021, arguably making Okung one of the highest-paid players in the NFL, and although bitcoin’s value has gone up and down a bit since then, it was still much higher at the end of 2021 than it ever was in 2020.

It’s not just big city mayors or the wealthy and connected who are being paid in bitcoin, either — a man claiming to work as a business development contractor for a tech company wrote to MarketWatch in May 2021 to ask if it was legal for his employer to ask for him to return the bitcoin it had paid him with when the value rose by 700% (it was not).

With appreciation rates like these, it’s easy to see why some people might be interested in getting paid in bitcoin. Is it actually a good idea, though? Here are some things that anyone interested in being paid in cryptocurrency should know before they agree to get their salary in such a way:

• The most popular cryptocurrencies are often very volatile

The value of one bitcoin was around $30,000 at the beginning of 2021, and the cryptocurrency quickly smashed its all-time record when it reached $40,000 on Jan. 7, 2021. It reached about $60,000 by April, then depreciated more than 50% to just under $30,000 by the summer. Then, in November, bitcoin again reached an all-time high of about $67,000 before depreciating again to around $45,000 as of January 2022 The volatility isn’t a new phenomenon either — while bitcoin has appreciated greatly since 2010, when the first-ever payment in the currency came out to about 10,000 bitcoin for two pizzas, it has long been known to jump around in value by thousands of dollars.

Other cryptocurrencies are rather unstable too: ethereum and dogecoin, for example, both peaked in May before dropping in value significantly. One ether was worth nearly $4,000 on May 7; by June 8, that was down to $2,520. The price of ethereum has since appreciated again to a range just under $4,000.

Dogecoin, while worth much less per unit than the previous two, reached a value of about 72 cents on the same date in May, then declined to around 34 cents over the course of the next month, and is now worth about 17 cents as of January 2022.

• This volatility makes taxes very, very complicated

“The complexity begins almost right away, because you have to estimate the US dollar equivalent of the payments and you still have to do the payroll tax withholding and all of the other things that go into the ordinary relationship between the worker and the employer,” David Yermack, an NYU law professor and cryptocurrency expert, told Top Class Actions in August.

It is already hard to do that because it is possible for the value of cryptocurrencies to differ depending on where they are being purchased from.

“That’s really part of the problem, there are many platforms in the US where you can trade bitcoin for dollars, but they tend not to be as synchronized as you might expect, “Yermack said.

But even apart from that, because of how much the most popular cryptocurrencies’ values can fluctuate, it can be very unclear how to calculate payroll taxes.

“You again come back to these measurement issues of, on the day that they pay me, that becomes taxable income and I need to convert that to US dollars for the IRS,” Yermack said. 

And an employer may have sourced all the cryptocurrency for salary payments it needs for the year on a single day — how would the employer record those compensation expenses if the value of the cryptocurrency went up?

“Nobody really knows the answers to a lot of these questions,” Yermack said, “because the questions are so new and the assets are so different from other assets.”

On top of that, earners who are paid in bitcoin are liable for capital gains taxes on their earnings, too, if the value of their paycheck increases.

“It would be similar to if someone paid your salary in shares of Apple computerComputer, and then you used those shares a month later to pay for dinner and the price went up — you have a capital gain … the complexity starts to become pretty elaborate in just keeping track,” Yermack said. “Every time that you spend it, you’ve got a taxable event in terms of capital gain, and that’s really messy and burdensome for people just trying to comply with the law.

• The most popular cryptocurrencies can’t truly replace traditional currencies

Most people aren’t using the most popular cryptocurrencies to pay for things — in fact, they’re rather inconvenient for that.

Yermack pointed out that bitcoin can only process a maximum of seven transactions per second, far short of what would be needed to be useful for commerce on a large scale. 

Ethereum and dogecoin are faster, but not enough to change things: their blockchains can process about 10-15 transactions per second and about 70 transactions per second, respectively. By contrast, Visa, for example, processes more than 1,700 transactions per second.

• The verdict

There’s nothing wrong, per se, with employers paying their workers in cryptocurrencies, or with their workers requesting it.

“You can pay your employees in anything they’re willing to accept,” Yermack said. “You could give them bushels of wheat or Yankees tickets or anything at all.”

However, as they are now, cryptocurrencies are perhaps useful investments, assuming their values continue to rise, but because of their volatility, tax complications and low maximum transactions per second, they are unable to replace traditional currencies at the moment.

And Yermack, for his part, said he believes they may not even be great investments anyway — there is no guarantee that their values will keep going up, though he also admits he has predicted the downfall of cryptocurrencies like bitcoin in the past, only to be proven incorrect.

“The risk is so extraordinarily high, the volatility of bitcoin from week to week is like no other asset we have in finance and I just don’t see that the compensation you might get for that risk is reasonable,” Yermack said. “Now I’ve been saying this for seven or eight years and I’ve been completely wrong, it just keeps going up. But can I justify a price of 40,000 for bitcoin? Not very easily, but as soon as I say that it rises another 20% the next month, so who knows?”

[getsocial app=”sharing_bar”]

---