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Cryptocurrency

Can Employers Pay Wages in Cryptocurrency?

Christopher Wood, CPP  

Christopher Wood, CPP  

New York City Mayor Eric Adams clarified receiving wages in cryptocurrency in January 2022 in a press release saying the U.S. Labor Department does not allow it. This blog will take a look at certain federal agency responses regarding paying wages in virtual currency.

In November of 2021, Miami, Florida Mayor Francis Suarez responded to a tweet that asked who would be the first U.S. politician to receive their first paycheck in Bitcoin. “I’m going to receive my next paycheck 100% in Bitcoin,” Suarez wrote.

Recently elected New York City Mayor Eric Adams added to the tweet responses on November 4, 2021, by writing that he would receive his first three paychecks via Bitcoin after being sworn in as mayor. He also noted that New York City would be the center for the cryptocurrency industry.

Cryptocurrency is becoming more used by consumers and more accepted by merchants and financial institutions as payment for services and products. This includes things from airline tickets to healthcare and luxury items like watches and sports cars. However, when it comes to wages, can employers pay employees in cryptocurrency?

What is cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography. Ideally, this makes it just about impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology. This is a distributed ledger enforced by a disparate network of computers. Cryptocurrencies are typically not issued by any central authority.

According to Investopedia, advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. On the other hand, there is price volatility, the high energy consumption for mining activities, and the use in criminal activities.

What’s the appeal of being paid in cryptocurrency?

Because some experts have predicted that the price of cryptocurrencies such as Bitcoin will continue to increase, some employees may want to be paid in this may because of its potential to grow in value. A January 5, 2022, Reuters News article reported on a Goldman Sachs research note to clients with a prediction that Bitcoin would take market share away from gold in 2022 as digital assets become more widely adopted.

The research note included a hypothetical scenario where if Bitcoin ends up with a 50% share of this market, its price would reach a little more than $100,000. Year to date, Bitcoin has traded as high as $47,733.40 (early January 2022) and as low as $35,070.10 (later in January 2022). As of Monday, April 11, 2022, Bitcoin is a little north of $41,000.

November 2021 Nasdaq press release referenced a global poll from the deVere Group that showed, “More than a third of Millennials and half of Generation Z would be happy to receive 50% of their salary in Bitcoin and/or other cryptocurrencies.” The survey explains that 36% of those polled born between 1980 and 1996 and 51% of those polled born between 1997 and 2012, “would welcome their jobs to pay in digital currencies.”

Can employers pay in cryptocurrency?

It appears that there is notable interest from employees to receive part of all of their wages in virtual currency. However, can employers pay wages in cryptocurrency?

Aaron Rodgers, NFL quarterback for the Green Bay Packers, announced in 2021 that he partnered with Cash App to turn part of his salary into Bitcoin. “[Cash App] have enabled me to take part of my NFL salary in Bitcoin for the very first time,” Rodgers said.

There are companies that allow users to allocate some-to-all of their paycheck into cryptocurrencies. However, an employee converting part or all of their received wages into cryptocurrency is different from an employer directly paying an employee wages in a virtual currency.

What the U.S. Labor Department said about paying wages with crypto.

On April 6, 2022, a representative for the U.S. Department of Labor’s (DOL) Office of Public Affairs provided an official response from the DOL on the question of whether employers could paid employee wages in cryptocurrencies.

The DOL explained that regulations under the Fair Labor Standards Act (FLSA), which is the federal law requiring minimum wage and overtime pay for covered employees, provide that wage payments may be made in cash or negotiable instrument payable at par (e.g., payment by check). This is found in 29 C.F.R. § 531.27 and 29 U.S.C. § 203(m)(1). The official DOL response also noted that whether in cash or facilities, wages must be paid finally or unconditionally, or free and clear. This is found in 29 C.F.R. § 531.35.

The DOL added that it had no further comment and referred back to its initial response when specifically asked a more “yes or no” question regarding if employers could pay employee wages in cryptocurrencies.

What the IRS said about paying wages with crypto.

On April 8, 2022, a representative from the IRS media relations responded to an inquiry regarding the payment of wages using cryptocurrencies by saying, “In general, employers may choose to pay employees in cryptocurrency.”

The IRS representative provided a reference to a list of frequently asked questions (FAQs) on the subject. FAQ # 11 specifically says that remuneration paid in virtual currency to an employee in exchange for services constitutes wages for federal employment tax purposes. The FAQ adds that the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to federal employment taxes and must be reported on Form W-2 (Wage and Tax Statement).

What the IRS said about paying federal taxes with crypto.

The IRS media relations representative explained on April 8, 2022 that the federal government does not currently accept virtual currencies for the payment of any federal taxes. This includes federal income tax, Federal Unemployment Tax Act (FUTA) tax, Social Security tax, Medicare tax, and Additional Medicare tax (i.e., employment taxes).

New York City Mayor Adams clarifies receiving wages in crypto.

On January 20, 2022, a press release from New York City Mayor Adams said that his first paycheck as mayor would be automatically converted into cryptocurrency – Ethereum and Bitcoin. However, back in November 2021, Adams appeared to indicate on Twitter that he would actually receive his first three paychecks via cryptocurrency.

The January 20, 2022 press release clarified that, due to U.S. DOL regulations, New York City cannot pay employees in cryptocurrency. But, using a cryptocurrency exchange, anyone paid in U.S. dollars can have the funds converted into virtual currency before the funds are deposited into their account.

This is an important difference. Like NFL quarterback Aaron Rodgers, Mayor Adams made a choice to convert wages received to virtual currency using an exchange. Their employers did not pay the wages in cryptocurrency.

Possible wage and hour issues with paying in crypto.

Issues that could arise if employers were permitted by DOL regulations to pay wages in cryptocurrency, may include FLSA minimum wage and overtime violations. Because virtual currencies can fluctuate in value, employers that pay wages in cryptocurrencies could unintentionally underpay their employees, which could lead to FLSA minimum wage and overtime violations, in addition to the exemption from the FLSA’s overtime requirement for salaried employees ($684 per week).

States have rules as well.

Issues with paying wages at the state and local levels could occur as well. For example, Cal. Lab. Cd. § 212 prohibits employers from paying wages to employees with any order, check, or other instrument “unless it is negotiable and payable in cash, on demand, without discount, at some established place of business in the state.”

Also, the Illinois Wage Payment and Collection Act (820 ILCS 115) says that wages must be paid in lawful money of the United States. This must be done, “by check, redeemable upon demand and without discount at a bank or other financial institution readily available to the employee, by deposit of funds in an account in a bank or other financial institution designated by the employee, or by a payroll card.”

Conclusion.

Although the IRS response above says that virtual currency paid to an employee in exchange for services are wages for federal employment tax purposes, the DOL response references its regulations that suggest wages should not be paid in the form of virtual currencies.

In addition, New York City Mayor Eric Adams, a high-profile politician, clarified a November 2021 tweet to explain he would convert his wages into cryptocurrencies, and not be paid wages in virtual currencies. Plus, an employer needs to consider any state and local rules on the subject.

The U.S. DOL and IRS may have more information or guidance on this subject in the future since the deVere Group’s global poll showed younger generations lean more toward receiving wages in cryptocurrencies. In the meantime, the safe bet is not to pay employee wages with cryptocurrencies. Employees can ultimately convert their received wages to virtual currencies via an exchange if they choose.

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