In today's fast-paced financial world, old-fashioned paying methods are gradually being replaced by more modern and innovative options. Leading this change is cryptocurrency, a type of digital money that is highly secure due to the use of cryptography.
Bitcoin, introduced in 2009, was the first cryptocurrency. Since then, the market has grown significantly, offering a wide range of digital currencies, each with unique features and potential value. As a result, over 5,000 unique cryptocurrencies are now available, and more businesses and forward-thinking individuals are starting to accept this new form of payment.
This comprehensive guide dives deep into the details of getting paid crypto. It will explain the benefits and drawbacks and give you a clear path to navigate this exciting and revolutionary process.
Benefits of getting paid in crypto
With the accelerating adoption of cryptocurrencies worldwide, being paid in crypto offers opportunities for quicker and more economic transactions and enables broader financial inclusion and potential investment growth. Here are just some of the benefits of getting paid in cryptocurrency.
Lower transaction fees
Conventional banking systems and online money transfer procedures often include fees and exchange costs that can add up over time. Cryptocurrencies, by their decentralised nature, are free from governmental or institutional control and can curtail these costs. In addition, without intermediaries, transactions can occur directly between parties, leading to more cost-efficient processes.
The speed of Bitcoin transactions is another unique advantage. Traditional bank transactions, particularly international transfers, can take several days due to numerous checkpoints and verifications. On the contrary, unhindered by geographical boundaries or bank working hours, crypto transactions can be completed within minutes. This acceleration in transaction speed benefits international businesses that want to pay freelancers or contractors in other countries quickly.
An estimated 1.7 billion adults globally do not have access to traditional banking services. Cryptocurrencies can bring financial services to this unbanked or underbanked population, promoting financial inclusion. In addition, anyone can create a crypto wallet and get paid in crypto by having a smartphone and internet connection.
Potential for higher earnings
The value of cryptocurrencies is known for their volatility. However, this can be an opportunity rather than a drawback for the adventurous. When you get paid in crypto, if the value of the crypto increases, you could end up with much more than your initial salary. It's like an investment and a paycheck rolled into one.
While cryptocurrencies have yet to be universally accepted, their usage is gaining traction around the globe. Many businesses now accept digital currencies, and some countries, such as El Salvador, have even adopted Bitcoin as legal tender. This global recognition opens up many international opportunities for individuals and businesses, making cryptocurrency an increasingly viable payment option.
How to get paid in crypto
Embracing crypto as a payment method might seem daunting at first, but with proper guidance, it can be a relatively straightforward process. From setting up your digital wallet to securing it, each step brings you closer to becoming a part of the rapidly expanding cryptocurrency ecosystem.
Researching and selecting a wallet
There are several types of digital wallets available, including software wallets (desktop or mobile apps), online wallets (web-based), and hardware wallets (physical devices). Research different wallet options to find one that suits your needs in terms of security, user-friendliness, and supported cryptocurrencies. The market is filled with wallet options ranging from online services like Coinbase to hardware wallets like Trezor and Ledger or even paper wallets for security-conscious individuals. The wallet of your choice will largely depend on your security preferences, usability needs, and the specific cryptocurrencies you plan to use.
Setting up a wallet
To start, you must set up a cryptocurrency wallet. This process is relatively straightforward - select your preferred wallet application, download it, and follow the instructions to set up an account. Be sure to secure your account with a strong and unique password. Once your account is set up, the wallet application will generate your public crypto address - the key to receiving payments in cryptocurrency.
Securing your wallet
Security should be your top priority when dealing with cryptocurrencies. First, safeguard your wallet by keeping your password and private key secure. Then, enable two-factor authentication for an additional layer of security, and ensure that you have a secure backup of your wallet details. Think of it as a digital vault; just as you would protect your physical valuables, your cryptocurrency wallet needs equal security, if not more.
The fundamental requirement to get paid in crypto is your public crypto address. Think of it as a unique identifier, similar to an email address, except it is typically a long string of alphanumeric characters. Just like you would share your email to receive messages, you share your public crypto address with the payer to get paid. They then use this address to transfer cryptocurrency directly to you. Lastly, to be paid in crypto, you'll need to work with an employer or an EOR that can accept and pay teams in crypto.
Tax implications of getting paid in crypto
Contrary to what some might believe, cryptocurrency transactions, including payments, are not beyond the purview of tax authorities. Getting paid in cryptocurrency can have tax implications, and it's essential to understand and comply with your tax obligations.
Here are some key considerations you will need to take into account regarding the tax implications of receiving crypto payments:
Taxable Income and Different laws
Much like your ordinary income, cryptocurrency payments are often considered taxable. This means you could be liable to pay income tax on the cryptocurrency you receive as payment and for capital gains tax if you decide to sell your crypto assets when their value increases.
Cryptocurrency payments are considered taxable in most jurisdictions, including the United States. The value of the crypto received at the time of receipt is generally used to determine the taxable amount. This means you need to report the value of the crypto payment as income on your tax return.
In the United Kingdom, for instance, Her Majesty's Revenue and Customs (HMRC) does not classify cryptocurrency as currency or money. Instead, individuals are subject to Capital Gains Tax or Income Tax depending on their activities and circumstances and must be reported separately on tax returns.
While the UK has been relatively progressive in creating cryptocurrency rules, other countries may have different regulations, with some yet to acknowledge cryptocurrencies as a legal form of payment, much less establishing tax laws concerning them.
If you receive cryptocurrency as payment for goods or services as a self-employed individual or freelancer, you may also be subject to self-employment taxes. In addition to income taxes, self-employment taxes cover Medicare and Social Security taxes. It's important to consult with a tax professional or accountant to determine your specific tax obligations.
If you receive one type of cryptocurrency and later exchange or convert it into another cryptocurrency, this may trigger additional tax obligations. In some jurisdictions, such transactions may be treated as taxable events, similar to selling or trading cryptocurrencies. It's crucial to understand the tax rules related to cryptocurrency conversions in your specific jurisdiction.
Record- Keeping and Reporting
Like traditional income, you must maintain detailed records of your cryptocurrency transactions for tax reporting purposes. This should include specifics like the date of each transaction, the value of the cryptocurrency at the time of the transaction, the goal, and the details of the other party involved.
Keeping accurate records will help simplify the process when it comes time to file your taxes and will provide crucial documentation if the authorities ever scrutinise your tax returns. Ensure that you are aware of the reporting requirements for cryptocurrency income in your country.
Some jurisdictions may require you to report or disclose crypto income on specific tax forms or disclose it separately. Failure to comply with reporting requirements can result in penalties or legal consequences.
Tax Professional Assistance:
Due to the complexities surrounding cryptocurrency taxation, it's highly recommended to consult a tax professional or accountant specialising in cryptocurrency taxation. They can provide guidance tailored to your situation and ensure tax law compliance.
Risks of getting paid in crypto
As any financial decision should be made after considering the potential risks, choosing to get paid in crypto also has particular challenges. These potential pitfalls could have substantial impacts on your earnings and financial security, and as such, understanding them is crucial before you embark on your crypto journey:
The value of cryptocurrencies can swing dramatically - they're renowned for their volatility. One minute, your digital salary might be worth a small fortune, and the next, it might have tumbled, potentially losing a significant chunk of its value quickly. So you must be comfortable with this unpredictability if you're considering getting paid in crypto.
Compared to traditional currencies, cryptocurrencies aren't backed by a government or central bank, which means the regulation of the crypto market is less consistent. This can make the crypto landscape unpredictable and open you up to legal uncertainties. Therefore, it's a good idea to stay updated with the evolving regulatory framework for cryptocurrencies in your region to ensure compliance and safeguard your interests.
Scams and fraud
There's a darker side to the anonymity of cryptocurrencies - they can be a magnet for scammers. So it's crucial to be cautious when transacting in digital currencies and to deal with reputable parties. Stay alert for red flags; if something seems too good to be true, it probably is. Always remember: the best protection against fraud is vigilance.
Getting paid in crypto can offer numerous benefits, such as lower transaction fees, faster payments, and the potential for higher earnings. First, however, it's crucial to understand the associated risks and tax implications.
As cryptocurrency becomes more widely accepted, it's worth considering the role it could play in your financial life. Remember, education and a measured approach to risk are the keys to successfully navigating this new landscape.
If your company is ready to explore how to onboard and pay its employees using cryptocurrencies, check out Teamed's services and explore the potential of EoRs for your workforce.