Policymakers and cryptocurrency users alike have struggled to wrap their heads around digital currencies.
Gyrations of the value of bitcoin and other digital currencies may cause users to earn fortunes or lose them overnight, giving regulators cause for pause and payroll professionals a headache.
Despite some regulators’ hesitation, the boom of bitcoin in 2017 coupled with a burgeoning proliferation of thousands of new digital currencies over the past few years quickly catapulted cryptocurrency into a mainstream spotlight. And with that, ushered in a wave of regulatory action.
Keeping track of a whole host of new compliance issues has become just as daunting as figuring out which newfangled token might become the next Dogecoin, a highly valued cryptocurrency based on the infamous internet meme.
Even amid volatility concerns, the draws of cryptocurrency for international payroll professional and multinational employers are clear. Hoping to lure younger tech-savvy employers or harness the new technology for transnational payments, a growing number of employers are excited to take the plunge into crypto.
Using digital coins or tokens mined with computers to pay employees in the real world may seem like something out of a science fiction novel. But, in reality, that future already is here.
Companies across the world have begun implementing payroll processes harnessing digital currency.
Japanese internet service provider GMO Internet, with more than 4,000 employees, made a high-profile announcement that it would offer the option of bitcoin-denominated salaries to employees starting in March 2018.
In December 2017, digital-asset manager Credit Suisse announced that the world’s first professional athlete to be paid fully and exclusively in bitcoin would be Nikolaj Rosenthal, a member of the Danish professional hockey team Rungsted Seier Capital. In Denmark, the Danish tax board is in the process of mulling changes to digital currency tax rules after a request from the Financial Services Authority.
Digital currencies continue to be subject to little regulation under Danish law in comparison to many other countries. Bitcoin is not considered legal currency in Denmark under March 2014 guidance by the country’s Central Bank, which said March 23 that it takes a negative position toward cryptocurrencies.
In the crypto space, payment in digital currency is an even more common investment among employees betting that the issuing companies and concepts will thrive.
Nonetheless, bitcoin and other digital currencies need to meet the definition of legal tender or currency in the vast majority of countries. The exclusion of digital currencies from the definition of legal tender or currency can present particular hurdles in countries with labor law provisions relating to the payment of wages in legal tender.
The treatment of crypto assets as property in the official communique of the Group of 20’s meeting in late March reflects an emerging international trend to regulate digital currencies as if they were properties or asset.
Standard-setting bodies for the Organisation for Economic
Co-operation and Development, including the
Financial Action Task Force implemented by G-20 ministers to develop standards
addressing challenges posed by digital currencies, are to report on digital
currencies, or on crypto assets, by July 2018. An update on the framework is to
be issued in 2019 and a consensus-based solution’ is to be released by 2020,
to the OECD secretary general’s two-part Report to G-20 finance ministers and Central Bank governors.
Policymakers at a Fork in the Road
Regulatory treatment of digital currencies for tax and payroll purposes varies widely from one country to the next.
In the U.S., cryptocurrency payments to employees are subject to taxes, the Internal Revenue Service reminded taxpayers in a March 23 release. Wages paid to employees in digital currency are subject to payroll, withholding, and income tax and should be reported to the IRS. The agency said in 2014 that bitcoin and other digital currencies were considered property for tax purposes, including if used a payment for wages.
U.S. employers also are required to ensure that nonexempt employees are paid applicable minimum wage rates as well as overtime wages under state minimum wage rules and the federal Fair Labor Standards Act, which requires employers to pay employees ‘‘prescribed wages, including overtime compensation, in cash or negotiable instrument payable at par.’’ The minimum salary requirement under the FLSA salary-basis test is required to be paid in U.S. currency or a negotiable instrument. Once that threshold is met, employers may pay employees the rest of the amount in digital currency. Digital currency valuation may present additional issues when calculating regular and back pay if a worker is misclassified as exempt.
Some tax and payroll professionals recommend paying the applicable minimum wage rate and overtime thresholds in fiat currency then an additional portion of remuneration in digital currency while others suggest giving employees a choice to be paid in a set amount fiat currency then immediately converting that amount to digital currency for employees who opt-in to be paid in digital currency and agree in writing to such a conversion.
Employers may find relief from some of the complex payroll calculations of paying employees regular wages in digital currencies by instead offering bonus payments in the form of digital currency. However, a bonus still may be considered part of an employee’s regular wages for purposes of overtime calculations even if the bonus is made using property such as digital currency, unless the bonus is made as a discretionary gift and is not correlated to hours worked, production achieved, or efficiency attained.
The European Banking Authority does not consider bitcoin or other digital currency to be legal currency but a 2015 ruling from the European Court of Justice that digital currency transactions are exempt from VAT has been interpreted by many as designating digital currencies closer to currency than property. Digital currency transactions may still be subject to other taxes in the EU and European countries have a wide wage of domestic policies on digital currency.
Bitcoin and other digital currencies do not meet the definitions of legal tender or currency across Belgium, Finland, the Netherlands, Norway, and Sweden, but are not prohibited for use in these countries.
Digital currencies are classified as assets or private money in the United Kingdom, meaning they may be used but are not required to be accepted as payment, under HM Revenue and Customs guidance. Bitcoin and other digital currencies are generally treated as movable assessable assets for tax purposes in Switzerland, according to guidance released by Swiss fiscal administrations. In Germany, the use of digital currencies is considered comparable to the use of conventional payment instruments so long as they serve no purpose other than that of a ‘‘pure payment instrument’’ rather than a speculative tool with which to trade and profit.
In Australia, employer payments to an employee in digital currency are generally treated as normal salary or wages and the employer is required to meet pay as you go (PAYG) obligations in the same manner as other payments in the absence of a valid salary sacrifice arrangement or considered a fringe benefit if the employee has a valid salary sacrifice arrangement with their employer to receive digital currency as remuneration instead of Australian dollars.
Effective since April 1, 2017, Japan legally recognizes bitcoin as a legal method of payment. Digital currency generally is subject to standard taxation models, including income tax and capital gains tax, under Japanese tax rules that went into effect July 1, 2017, though Japan’s standard-setting body is in the process of developing further standards for regulation and taxation of digital currencies
Bitcoin and other digital currencies are considered a virtual or intangible ‘commodity’ that is not legal tender in Hong Kong, guidance from the president of the Hong Kong Monetary Authority confirmed in September 2017.
Most tax authorities require reporting, withholding, and payment of taxes in a country’s designated legal tender. A notable exception to this is the Swiss municipality of Chiasso, which permits residents to pay their taxes in bitcoin.
Development of digital currency taxation policies has accelerated as interest in bitcoin and other cryptocurrency gains momentum, especially in the wake of the recent finance ministers’ meeting at the G-20 summit, where regulation of crypto-assets was a hot topic.
For example, Thailand’s tax framework for digital currencies was announced by the Thai finance minister after a March 27 cabinet meeting and would become law once the draft decree published in the country’s Royal Gazette.
South Korea’s Ministry of Strategy and Finance also announced plans to release a digital currency taxation framework by July 2018 and begin taxation in 2019, the Ministry of Strategy and Finance said in a statement March 25.
In early 2018, French Finance Minister Bruno Le Maire ordered France’s central bank chief to develop a new regulatory framework. The French Ministry of Economy and does not recognize bitcoin or any other digital currency as an official currency, but all revenues generated from digital currency transactions are subject to taxation according to 2014 guidance. ‘‘Crypto is more an asset than a currency,’’ Le Maire said at the G-20 meeting.
Digital currencies are not a legal tender in Canada under guidance from the Financial Consumer Agency of Canada Jan. 1, 2018. Instead, digital currency payments to Canadian employees are treated in a similar manner to barter transactions when one commodity is exchanged for another, within the purview of the Income Tax Act for income tax purposes, the Canada Revenue Agency said in guidance March 3, 2018. Any amount that an employee receives digital currency as payment for salary or wages is required to be included in that employee’s income as calculated in Canadian dollars and employers are required to make deductions with amounts remitted in Canadian dollars.
Although digital currencies do not fall under Israel’s legal definition of currency, digital currencies generally are regarded as barter transactions and considered a taxable asset subject capital gains taxes or value-added tax as applicable, the Israel Tax Authority said in 2017 guidance and a circular released in February 2018.
In Russia, digital currencies are restricted under Article 140 of the Russian Civil Code, which generally recognizes the Russian ruble as the exclusive means of payment and requires that all prices for financial transactions conducted in Russia be defined in rubles. Russian President Vladimir Putin ordered new digital currency legislation to be finalized by July 1, 2018, said a report March 1 from Russia’s Parliament Newspaper, the official publication of the state’s legislative body. Draft laws have been prepared by the Central Bank of Russia and the Ministry of Finance but not yet finalized.
While some countries are moving ahead with regulation and taxation of digital currencies, others have hit the brakes on its use for payment purposes and legal status of cryptocurrency remains dicey.
As technology pushes new boundaries, novel issues surrounding the use of cryptocurrency to pay employees continue to emerge.
Some countries have pivoted to an “if you can't beat'em, join 'em” approach to digital currency with the development of their own state-backed cryptocurrencies. Central banks around the world, including Brazil, China, Estonia, India, Iran, Japan, Kazakhstan, Russia, Sweden, and Turkey, Uruguay, and the United Kingdom, are mulling the development of state-backed cryptocurrencies following Venezuela’s launch of the Petro digital currency in March 2018 to mixed reception.
If recognized as legal tender, these state-backed cryptocurrencies may alleviate some of the hurdles related to minimum wage and overtime requirements and would likely force some countries to reevaluate tax treatment of digital currencies.
As new technology is developed and policies continue to change, payroll professionals and employers considering digital currency payroll should remain vigilant to minimize the risk of noncompliance later.
Download Bloomberg Tax’s latest strategic white paper, Cryptocurrency Payroll: A Multinational Tax and Labor Law Comparison , for more information.
Take a free trial of Bloomberg Tax’s International Payroll Decision Support Network . With more than 90 countries covered, this is your one-stop resource for reliable, up-to-date guidance and analysis in every area of global payroll administration and compliance.
Anna Massoglia is a research analyst with Bloomberg Tax, where she writes and edits the International Payroll Decision Support Network’s news and analysis covering payroll compliance issues in more than 90 countries and regions. She holds a J.D. degree from the University of the District of Columbia School of Law and graduated magna cum laude from North Carolina State University with a B.A. degree from the psychology honors program, a B.A. degree in political science, and a concentration in American politics.
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