(Bloomberg Opinion) – Cryptocurrencies have seen a rebound after months of declines, which gives some credit to those who say digital currencies are resilient and on the verge of becoming more accepted, even though it’s too difficult to predict anything when it matters from Bitcoin and others. Coins, more people are paid or want to be paid in cryptocurrencies, from professional athletes to tech workers and more. They invoke the simplicity and transparency of payments in digital currency, especially when employers and employees do not rely on them. However, there are a few important considerations to keep in mind. Volatility aside, one misstep could result in improper compensation or potential problems with the Internal Revenue Service.
Employers can defend themselves against crypto compensation at an early stage. It is a lot more work for them to withhold some of the income needed to pay Social Security and Medicare taxes. If an employee is paid in digital currencies, employers must expect back payments. Accounting for and converting a portion of that income into US dollars to pay these federal taxes. It is mandatory for contractors to request a 1099 form which is used to report the earnings of the companies they work for. You should request a detailed listing of when individual units of Bitcoin or similar were received and their price. so it will help those who receive this form of compensation to accurately calculate their tax obligations. Note that non-employees are responsible for paying self-employment tax (a 15.3% tax that goes to Social Security and Medicare).Software like cryptotrader.tax and bitcoin.tax can help with keeping records.
The recipients owe ordinary income tax on the market value of the coins upon receipt of the coins. In addition, they are charged with capital gains taxes when selling or exchanging the coins for other digital currencies. Within a year, they will be subject to taxation – temporary withholding tax rates (which generally correspond to normal income tax rates) or, if they are longer, they will face long-term withholding tax rates (0%, 15% or 20%, depending on the tax rate) as employers do not automatically taxes withheld for contractors. These workers are generally encouraged to make estimated tax payments each quarter instead of paying a large bill when filing their returns (earning more than $ 150,000) of what they paid for the year inside. This helps avoid penalties for underpayment if they occur at the end of the tax year. Some cryptocurrency supporters may be reluctant to sell inventory to make these estimated payments and would rather face the underpayment penalty. This could be a red flag for the IRS to initiate an investigation.
It is advisable to speak to an employer in advance when calculating the compensation value in cryptocurrencies. Is it when a work period ends? Or when is the payment due? Given the volatility of Bitcoin and others, a few days can make a big difference. Agreeing on how to catch up on paid vacation days is also helpful, says Nicole Green, director of the NGG Tax Group. Those who work for cryptocurrency-oriented companies can get compensation in the form of private tokens, which are not as easy to trade as Bitcoin, Ethereum, or Litecoin. Calculating the fair market value of these tokens can be tricky when calculating the tax due, but token holders should not use this as a free pass to circumvent reporting requirements.
In addition, these currencies can be granted as additional compensation, similar to stock options, but there is one important difference: with stock options, the recipient has the option of recognizing part of the income earlier in order to reduce taxes in the future. The IRS is unlikely to allow a private token holder to make the same choice, according to Matt Metras, a registered broker who works with a dozen customers who are settled in cryptocurrencies. It’s generally a hybrid, with some allowances in cryptocurrencies and some in dollars. For those more optimistic about the future of digital currencies, it is better to invest in them directly than to bet with your paycheck. This column does not necessarily represent the views of the editors or Bloomberg LP or their owners. Alexis Leondis is Bloomberg Opinion’s columnist on personal finance. Previously, she oversaw the tax coverage of Bloomberg News.
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