As cryptocurrency becomes more mainstream, employees in the technology and finance sectors are exploring the idea of receiving wages in digital assets. While this trend reflects broader innovations in financial technology, it remains a niche practice, not a widespread shift in payroll systems.
Employers considering crypto-based compensation must proceed with extreme caution and ensure that neither the employment position nor level of compensation could fall under the scope of, or violate any, federal and state wage or tax laws.
These benefits come with substantial legal risks, particularly concerning the Fair Labor Standards Act and the complex regulatory environment surrounding cryptocurrencies.
Benefits and Legal Hurdles
One high-profile example of an employee opting for cryptocurrency compensation is NFL star Odell Beckham Jr., who chose to receive his $750,000 salary in Bitcoin in 2021. At the time, this was seen as a bold move, with many questioning whether it was financially wise. When Bitcoin's price dropped significantly in 2022, Beckham's decision seemed risky, as Bitcoin fell to a low of $16,000.
However, by December 2024, Bitcoin had surged past $100,000 per coin, making Beckham's $750,000 salary worth approximately $1.17 million. This fluctuation exemplifies the volatility of cryptocurrencies and the potential financial upside that could be attractive to employees.
A recent study by Clarify Capital found that 30% of employees are open to receiving wages in cryptocurrency, despite its volatility. The same study, which surveyed 800 employees and 200 business owners, also revealed that 20% of participants expect cryptocurrency to become a regular part of payroll within the next five years. These statistics highlight the growing mainstream acceptance of digital assets.
Despite the growing interest, the vast majority of employees still prefer traditional payroll systems. A majority of workers and employers believe cryptocurrency compensation is neither practical nor legally advisable.
Unlike traditional payroll systems, which ensure stable and compliant wage payments, crypto-based pay introduces significant legal, tax, and regulatory risks that employers can't ignore. The legal and financial barriers to crypto payroll remain too significant for most companies to adopt at scale.
Compliance and Taxation Concerns
The most pressing legal concern for employers is compliance with the Fair Labor Standards Act. The FLSA mandates that employees are paid in "cash or negotiable instruments payable at par," a definition that doesn't include cryptocurrency due to its volatile nature and lack of legal tender status.
Cryptocurrency's unpredictability—in terms of both value and transaction times—could create issues with ensuring that employees are paid at least the minimum wage and entitled to overtime pay, as required under the FLSA.
Another important consideration for employers is tax compliance. The IRS treats cryptocurrencies as property, not currency. Employers are required to withhold the appropriate income and employment taxes in US dollars, especially given the fluctuations in crypto prices. If employers fail to properly value cryptocurrency at the time of payment, they could face penalties and audits from the IRS.
Beyond tax and wage concerns, employers must be aware of the potential securities classification. If a cryptocurrency is deemed a security by regulators, paying employees in such digital assets could violate securities laws.
If an employer pays employees in a token or coin that is deemed a security, it could face enforcement actions from the Securities and Exchange Commission for failing to comply with securities registration requirements. Therefore, businesses must conduct due diligence of the cryptocurrency used in employee compensation to ensure they aren't violating securities laws.
A Look Ahead
Given the numerous legal barriers and financial risks, employers shouldn't rush to adopt crypto-based wages. Employers offering digital payments should ensure compliance with all applicable laws, including wage and hour regulations and tax requirements.
Given the complexities involved, such as overtime calculations and benefits considerations, careful planning and legal review are essential to mitigate potential risks.
Employers also should ensure compliance with wage laws by confirming that crypto payments don't fall below minimum wage laws. Additionally, working with tax professionals and using payroll services that support cryptocurrency will be crucial to avoid mistakes in tax reporting.
Cryptocurrency compensation would generally be based on its fair market value when it's delivered to the employee, not when taxes are paid. Employers can reduce the legal risks associated with crypto payroll systems by staying informed about the latest regulatory changes and seeking professional guidance.
Until regulators provide clear guidance, companies must proceed with caution. The growing demand for cryptocurrency compensation reflects broader changes in the workforce and financial systems. However, the legal landscape remains complicated, and businesses that wish to offer crypto salaries must remain vigilant to avoid potential compliance issues.
By working closely with legal and tax professionals, employers can position themselves to take advantage of this trend without falling into regulatory traps.
Originally published by Bloomberg.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
