The Tax Implications of Salaries in Bitcoins
Tech startups are now starting to trend toward paying their staff in a new form of payment: bitcoins. But they might be forgetting about the tax implications of salaries in bitcoins.
It’s easy to see the allure of getting paid in bitcoins for those that work in innovative, cutting edge environments, for bitcoins themselves are innovative and cutting edge. It’s no wonder that more and more employees in tech startups are asking for some or all of their salary to be paid in bitcoins.
Over the past few weeks there has been a barrage of media attention on the subject of employers paying their employees in bitcoins. This was all thanks to Wagepoint, who ran a nifty little online payroll platform that actually gives you the options of receiving all (or some) of your salary in bitcoins. Last month, Wagepoint processed close to $75,000 worth of salaries that were paid in bitcoins in August, and surely this number will only increase. It certainly caught the attention of Coindesk.
Although, in that same article, I spoke briefly to Coindesk on the tax consequences of being paid in bitcoins, I wanted to take an opportunity to delve a bit deeper into the subject and set the record straight on what type of tax implications can be expected and what actions you should take on your end to make sure that you’re protected.
Before going any further, let it be known that we have very little guidance to go on as the Canada Revenue Agency has kept a pretty close lip on the tax treatment for bitcoin related transactions. Luckily, they had put out a news bulletin last November which touched briefly on the subject of digital currencies such as bitcoin.
The news bulletin states that parties receiving bitcoins should treat these transactions as a barter transaction. Essentially, for the moment, the CRA treats bitcoins as a type of commodity. So if your employer is paying you in bitcoins, then a barter transaction is occurring, where you are giving up your services in return for bitcoins the “commodity.”
In such a transaction, the CRA actually asks that you value the service that you are giving up (and not the bitcoins that you are receiving) and include this amount in your income for tax purposes. So if your services for the month are valued at $2,000 and you receive four bitcoins in return, you would include $2,000 in your income instead of trying to value the four bitcoins that you received.
Generally, this isn’t a major issue, as the four bitcoins you receive will likely be equal to the value of the services you gave up since most of the time parties are usually transacting at fair market value. But what about when you work in a tech startup where, at times, your salary is less than market?
Let’s say your services on the market are worth $2,000 per month, but you’re actually only getting paid two bitcoins instead of four because you are in a growth position with a chance at equity. In that case, the bitcoins you receive are worth less than the services you have given up, and as a result, a taxable gain of $1,000 would also apply (ie. the difference between the market value of your services and the bitcoins received). This is a rare situation, but it is certainly a possibility.
GAINS AND LOSSES
Some employees may opt to get paid in bitcoins as they believe in their future and as such, view them as an investment opportunity. Since the value of bitcoins fluctuates, we are presented with tax consequences relating to gains or losses. Calculating these gains or losses aren’t overly complicated, but we do need to do a little record keeping on our end for proper reporting purposes.
If we receive one bitcoin worth $500 in September and another bitcoin worth $550 in October, then the average price of each coin in your holdings would be $525. This would be the number to base your gain or loss calculations. If you later sold one of these coins at $600, then a resulting gain of $75 would arise, and you would be responsible for reporting this on your tax return. These gains arise whenever you dispose of coins, either through their sale or through using them to purchase something.
In order to be on top of things (and I highly recommend that you are), you want to track all bitcoins entering and leaving your bitcoin address in a spreadsheet. You would have a column for the date of the transaction, the number of bitcoins you received/disposed as well as a column for the value of the coin at the time you received it. With this information, we can use a few simple formulas to calculate the average price of your coins on an ongoing basis so that we can calculate your gains and losses and then report the final number on your tax return come April.
A much easier alternative to the method described above would be to use something like Libratax, which is the first cloud system that connects to your bitcoin address via the Blockchain, downloads your bitcoin transactions and automatically calculates the gains/losses for you. Easy peasy. The only issue at the moment is that we would need to convert the gains/losses into CAD since the system only works for USD at the moment.
On the employer side of the equation, the tax consequences differ depending on how your bitcoins are paid out.
If you use a system such as Wagepoint, which deducts $CAD from your bank account, converts these dollars to bitcoins on their end and then remits these bitcoins to your staff, then there actually aren’t any tax consequences and the process is pretty simple on your end..
If, however, you have bitcoin holding and you are using these coins to pay your staff, then you’ll need to calculate payroll withholding taxes based on the Canadian dollar value of what you’re paying them and as well deal with gains or loss consequences described above as each time a payment is made, a disposition of your coins is occurring.
PAID IN BITCOINS: GOOD IDEA?
Well, that depends on who you ask. At the end of the day, for some, the benefits outweigh the costs. For others, their tolerance to risk is much lower and they would rather something a bit more steady in value, such as dollars.
For those in the tech world however, I think you’re going to see this payment method becoming more and more popular as time goes on.
(Disclaimer: Tax is a very complex matter and the consequences differ from situation to situation and person to person. It is advised to seek professional help if you are uncertain about any of the tax consequences.)