When bitcoin and ethereum rallied to records in November on news of wider adoption, politicians and athletes scrambled to ride the momentum by announcing they’d collect parts of their salary in crypto.
Among them were New York City Mayor Eric Adams, who vowed after his election that he’d accept his first three paychecks in bitcoin, and wide receiver Odell Beckham Jr., who opted to take his entire NFL salary in the token after signing a new contract with the Los Angeles Rams.
But the cryptocurrency sell-off that has dragged digital asset prices to lows shows that challenges around crypto payrolls remain and those vying to get their wages and other benefits in digital currencies may want to tread with caution.
“Taking part of your salary in bitcoin is a way to publicly signal your support for the space and your belief that it will succeed. It’s a way to vote with your wallet." Christian Catalani, founder of the MIT Cryptoeconomics Lab told Yahoo Finance. "Of course, because of the volatility, this involves risk — and that’s why most people only take a part they can afford to lose.”
There are advantages of getting paid in cryptocurrency for employees and employers alike: transfers are efficient and cost-effective, it cuts out the intermediary financial institution, and it’s an investment with potential for upside. However, just as digital currencies have the ability to trend forward, downward swings may result in fast and unexpected value losses that could instantly cut employee wages.
"It is important to note that in many of the cases we’ve heard about, the individual is actually converting their salary, or a portion of it, into crypto after getting paid rather than their employer transferring crypto to them," Cathy Barrera, founding economist of Prysm Group and program director of the Wharton Economics of Blockchain and Digital Assets program, told Yahoo Finance. "But even for those whose employer is converting their dollars earned into crypto, we should think about these activities as being similar to investing some portion of one’s income."
"The big difference is that crypto is a riskier asset than traditional investments," Barrera added.
Leading 'a generation of prosperity and innovation'
At about $38,000, bitcoin, the largest digital cryptocurrency, has nearly halved its value since peaking in November at $69,000. Ethereum — the second-largest digital coin — has slumped to $2,700 from its high of about $4,600 as potential rate hikes by the Federal Reserve prompt investors to dump high-risk assets.
As a result, Adams, who rakes in an annual salary of $258,750, for biweekly paychecks of about $5,900 after average tax withholdings, was estimated to have lost more than $1,000 on his first mayoral payment after converting his check to bitcoin and ethereum (after they plunged in value), according to a New York Post analysis.
In response to a request for comment, the mayor’s office told Yahoo Finance: “The Mayor is clear: New York City is the center of the world, and it should be the center of innovation. By converting his paycheck to cryptocurrency, as he previously said he would, he hopes to encourage the growth of this burgeoning sector and aid the City’s economic recovery.”
Adams is not the only politico striving to lead the way in the financial system of the future. His move follows that of Miami’s bitcoin-loving mayor Francis Suarez, who collects 100% of his paycheck in the cryptocurrency, has actively vied for city residents to get digital wallets and listed paying government employees in bitcoin as a top priority.
In his mayoral acceptance speech last month, Suarez called on city leaders across the country to work together to make crypto use more widespread, citing surging inflation and financial innovation as reasons to adopt digital assets.
"I'm going to ask my friends, my brothers and sisters, the mayors of this country to sign on to a mayoral crypto compact, because we need to lead in the absence of leadership," he said. "We need to make sure that a generation of prosperity and innovation is not lost because of a lack of innovative spirit."
Rising inflation has been an argument among proponents of crypto salaries, but with growing parallels in the price movements of bitcoin and stocks, that premise has been doubted by some experts.
Portfolio Wealth Advisors CIO Lee Munson told Yahoo Finance Live that bitcoin's downward price action over the past couple months "blew the thesis" that people view bitcoin as a gold substitute for an inflation hedge or as a substitute for capricious central banking policies on a rate hiking cycle.
"I always suspected it was a risk asset, and this year it's acting like a risk asset," Munson said, adding, "I think the New York mayor is crazy, and it's just a big PR stunt."
WASHINGTON, DC - JANUARY 19: Francis Suarez, Mayor of Miami and President of The United States Conference of Mayors (USCM), speaks during the 90th Winter Meeting of USCM on January 19, 2022 in Washington, DC. The U.S. Conference of Mayors held its annual winter meeting to hear from Congressional leaders, Biden Administration officials, and other experts to discuss the best ways to achieve the goals of America’s cities in 2022. (Photo by Alex Wong/Getty Images) ·(Alex Wong via Getty Images)
Most recently, Belgian politician Christophe De Beukelaer — a self-proclaimed crypto enthusiast, according to his Twitter bio — has decided to receive his paychecks in bitcoin, attributing his inspiration to Adams.
While politicians and athletes can afford to weather the downturn, market drops may be more costly for regular workers looking to cash in on crypto — and volatility isn’t the only thing dampening the reality of getting paid in crypto.
U.S. companies have made strides factoring crypto into their operations, with many accepting bitcoin payments and adding digital currencies to their balance sheets in some way, but broader-case use has a ways to go, which could make using crypto difficult for every day expenses such as grocery shopping or paying rent.
Are crypto earnings taxable?
From a tax perspective, cryptocurrency payrolls can also pose a challenge. So far, the Internal Revenue Service (IRS) guidance is sparse and prone to change as regulatory clarity looms. Under current rules, most digital assets are taxed as property, not currency for U.S. federal income tax purposes, and an individual can owe either regular income taxes or capital gains rates on their allocations depending on the value and holding period.
“Whether being paid in cryptocurrency is advantageous or disadvantageous [from a tax perspective] is going to depend on market conditions and how the contract is structured,” Josh Tompkins, managing director of KPMG’s Washington National Tax division, told Yahoo Finance.
“Generally, the taxable income consequences are going to mirror the economics of the contract, measured in U.S. dollar terms,” he explained. “For example, if a contract is structured so that a person would be paid a certain number of bitcoin regardless of market prices, that contract would be significantly less valuable in U.S. dollar terms if the price of bitcoin declines.”
Tompkins also explained that one's taxable income if paid in crypto could be less than it otherwise would have been if that income is determined using the value of a digital currency on the date of receipt. The opposite would hold true if the income on the receipt appreciates against the U.S. dollar — that income could be higher.
Under certain contracts, on the other hand, the amount paid may be expressed in U.S. dollars but simply payable in cryptocurrency.
“In those cases the fair market value being transferred to the service provider [one receiving payment] is fixed in U.S. dollar terms and the taxable income attributable to the contract would not change, despite the fact that the amount of cryptocurrency ultimately delivered would depend on current market prices,” Tompkins said. “It should be kept in mind that there may be fees associated in exchanging the cryptocurrency received into fiat currency, which could also be a disadvantage.”
On the employer side, payroll systems specializing in crypto are still in the early stages and come with potential challenges for payroll departments attempting to navigate them.
While private businesses are trying to fill the gaps and move the innovation forward, regulatory uncertainty around cryptocurrency may continue to pose a challenge for employers trying to understand and follow the rules. The Biden administration is preparing to unveil a government-wide strategy to regulate cryptocurrencies as early as February, but the rollout of a framework is still underway and can take time before it is more widely adopted — and understood — by companies considering paying their workers in crypto.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
