Getting paid in Bitcoin sounds very appealing for those believing in its long-term price appreciation. But, what are the tax implications of getting paid in Bitcoin as an employee? What about the tax implications if you’re a freelancer or contractor getting paid in Bitcoin? Or, if you receive a bonus in Bitcoin?
For clarification on your tax obligations as a crypto holder, check out our comprehensive guide about which crypto events are taxable.
Tax Implications of Receiving a Salary in Bitcoin
As more people ask tor receive their salaries in crypto, let’s find out more about the tax implications when getting paid in Bitcoin, whether as a salary or for services provided in the US.
According to the IRS guide for crypto, if you receive crypto in exchange for any service you provide, you’ll have a taxable event in the US. As a base case, whenever you receive compensation in the form of any crypto for a service you performed, you’ll have to recognize ordinary income.
If your salary is in crypto, the IRS considers the fair market value of crypto in US dollars at the date of your receipt for federal income tax and payroll tax calculation purposes.
Tax Reporting for your Bitcoin Salary
In the US, many crypto transactions (e.g., crypto-to-crypto, crypto-to-FIAT, crypto purchases) are taxable events. As a result, you’ll have to report them to the IRS. Furthermore, if you receive your wage/salary in Bitcoin or another cryptocurrency, besides the federal income tax obligation, your wages have to be “reported on Form W-2, Wage and Tax Statement”.
Let’s look at a simple situation of an employee who starts receiving her salary in Bitcoin.
Charlotte starts receiving her salary in Bitcoin in 2021
In January 2021, Charlotte started to receive her monthly salary in Bitcoin. Her salary will be $5,000/month for every month in 2021. As a result, the amount of Bitcoin will depend on its price variation month over month, but its USD basis is always the same.
Charlotte’s yearly taxable income basis in USD
At the end of 2021, Charlotte reports her total income of $60K, and after deductions and other factors, her total taxable income is $50K. In this example, Charlotte hasn’t sold any of her crypto yet. We also assume that she is filing as single and having in mind the income tax brackets for 2021. Her tax scenario in 2021 will be:
Capital Gains if later disposing of Bitcoin at a profit
In March 2023, Charlotte decided to sell all of her Bitcoin to take advantage of Bitcoin’s all-time high price. At that time, Bitcoin’s price is $100K. Let’s assume that Bitcoin’s price variation during 2021 led to Charlotte amounting 1.1 BTC in total at a cost basis of $60K (total amount of salaries paid in Bitcoin during 2020).
Charlotte’s profit will be $50K ($110K – $60K) and taxed at a capital gains level. Charlotte will benefit from a long-term capital gains tax rate due to selling after 12 months of holding her Bitcoin.
As a result, Charlotte will pay $7,500 ($50K x 15%*) in capital gains taxes.
*Long-term capital gains tax rates range from 0% to 20% in the US. We assume a 15% long-term capital gain tax for simplicity purposes. However, these rates are merely indicative as the real ones will depend on your total income level and family status (married/single) as a US taxpayer.
What about receiving a year-end bonus in Bitcoin?
If you received a year-end bonus in BTC, whether you receive your salary in crypto or not, you’ll have to add that amount to your total income. The amount of bonus income you need to recognize, which will become your cost basis in the crypto you received, is the fair market value in USD at the time you receive the crypto.
Tax implications of getting paid in Bitcoin as an independent contractor
According to the IRS, if you receive Bitcoin or any other crypto as a form of payment for services you provided as an independent contractor, you’ll have to self-employment tax on top of your income tax. Currently, self-employment tax is at 15.3% in the US, between social security payments and medicare. You can get a deduction for some of these taxes when you file your tax returns.
Let’s make a quick simulation if you work as an independent contractor and receive payments in crypto.
John’s Bitcoin payments received in 2020
John receives the following BTC payments during 2020:
January: 0.2 BTC (2,000$)
February: 0.3 BTC (3,000$)
March: 0.5 BTC (3,000$)
April: 0.25 BTC (2,000$)
May: 0.12 BTC (1,000$)
June: 0.12 BTC (1,000$)
July: 0.12 BTC (1,000$)
August: 0.2 BTC (2,200$)
September: 0.4 BTC (4,000$)
October: 0.22 BTC (2,220$)
November: 0.2 BTC (3,000$)
December: 0.2 BTC (4,000$)
John’s total income and self employment taxes
In 2020, John’s total income adds up to $28,420. As a result, John’s self-employment taxes will be $4,348.26 ($28,420 x 15.3%) in this simulation if we don’t account for possible deductions.
For this total taxable income level and assuming John’s filing status is single, his income tax will be 12% in the US (2020 values). Therefore, John’s income tax for 2020 will be $3,213: $987.5 plus 12% of $18,545 ($28,420 – $9,875).
Capital gains tax in the future
If John later sells his Bitcoin at a profit, he’ll be liable for capital gains tax, in a similar fashion as with Charlotte’s simulation.
Bitcoin salary? Tax Planning is your friend
Receiving payment for services or your salary in Bitcoin could be interesting if you plan to hold in the long-term and reduce your total tax bill by taking advantage of a long-term capital gains tax setting.
However, if you don’t convert any of your earned crypto from salaries in USD, you’ll have to pay taxes with cash savings since it’s not possible to pay taxes in crypto. As a result, careful tax planning is crucial in these scenarios as you’ll probably need to sell part of your crypto during the year to have enough money to pay for taxes.
Unfortunately, these sales will probably be taxed at a short-term capital gains tax rate (ranging from 10% to 37% in the US), which only reinforces the need for careful tax planning. By doing so, you’re able to maximize your long-term holdings versus your short-term tax obligations.
*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.