Before getting paid in cryptocurrency, it’s essential to be aware of the tax treatment of cryptocurrency by the IRS.
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How to get paid in bitcoin or another crypto
Want to get paid in bitcoin or another crypto? There are plenty of ways to go about it.
Bitcoin (BTC) has long had a reputation as the currency of choice for criminals eager to receive payment in a hard-to-trace form. Recent reports suggest this is changing, with other privacy coins becoming increasingly popular with the underground, but it also obscures the fact that there are actually many legitimate ways for businesses and individuals to get paid in cryptocurrency.
From online payment systems designed to make it easier to buy and sell using BTC to companies and job-seeker platforms providing payment in cryptocurrency, there are plenty of reasons why you might want to receive payment in the form of digital currency.
Working for crypto
When the PyeongChang Winter Olympics kicked off in February 2018, Canadian speed skater Ted-Jan Bloemen made headlines for becoming the first athlete to be paid in cryptocurrency. The arrangement was part of a sponsorship deal with ONG Social, a social network and crypto community, and virtual reality provider CEEK VR.
Elsewhere, more than 4,000 employees at the Japanese Internet firm, GMO Group, have the option to receive a portion of their salary in bitcoin, while plenty of other companies in the crypto sphere have been offering bitcoin salary payments for years. When you consider that cryptocurrencies are designed to offer a viable replacement for fiat currency, this makes sense.
There are even several job-seeking websites designed to allow freelancers to find work and get paid in cryptocurrency. For example, Ethlance allows its users to hire or work for Ether (ETH), while Coinality aims to connect employees and job seekers with job opportunities that pay in digital currency.
If you currently have a job, you could also ask your employer whether it’s possible to get a portion of your salary paid in bitcoin. However, with many employers wary of paying in cryptocurrency, you may have to explore other options. One example is Bitwage, which specializes in converting fiat currency salaries into cryptocurrency and is currently only available in payments from UK, US and European employers.
Earning a passive income from crypto
One of the key ways investors can earn money from shares is to buy stock in a company that pays dividends to shareholders. This practice is mirrored in the crypto world, as some cryptocurrencies also pay dividends to coin or token owners.
The two most common ways to access dividends are by:
- Staking. You can earn interest by storing a proof-of-stake coin in a special wallet.
- Holding. You can earn interest on your cryptocurrency by buying and holding a specific coin or token in any wallet.
In this way, some cryptocurrencies provide added value to buyers, providing the opportunity to earn a passive income from your crypto holdings.
Take a look at the table below for a roundup of some of the most well-known dividend-paying coins.
|NEO (NEO)||GAS token paid out with each new NEO block, proportional to the amount of NEO held.||Learn more|
|Komodo (KMD)||5% interest earned on KMD holdings, paid annually.||Learn more|
|KuCoin Shares (KCS)||Fees collected on the KuCoin exchange are paid out to holders daily, proportional to the amount of KCS held.||Learn more|
|BridgeCoin (BCO)||50% of profits from the Crypto Bridge decentralized exchange are paid out to holders who stake their coins, depending on the amount of BCO held.||Learn more|
|Neblio (NEBL)||10% interest earned on NEBL holdings for those who stake their coins.||Learn more|
|PIVX (PIVX)||~4.8% interest earned on PIVX holdings for those who stake their coins.||Learn more|
|Nav Coin (NAV)||Up to 5% earned on NAV holdings for those who stake their coins.||Learn more|
Mining is the process by which cryptocurrency transactions are validated and miners are rewarded with cryptocurrency for their efforts. Mining is done using special mining programs and uses the processing power of the miner’s computer. It’s a slightly confusing concept to wrap your head around at first, so check out our guide to bitcoin mining for an in-depth explanation.
These days, it’s quite difficult to make money mining bitcoin, as the process now requires specialized equipment, significant processing power and a whole lot of electricity. However, there are plenty of other cryptocurrencies that can be mined, including Ether (ETH), Zcash (ZEC) and Monero (XMR). While mining isn’t an easy way to earn a second income, it can be a useful hobby to help you earn additional funds.
However, it’s also important to be aware of the tax implications of mining bitcoin in the US. The IRS considers any money you make from mining bitcoin as self-employment income.
Other ways to get paid in crypto
There are plenty of other ways you can potentially earn small amounts of cryptocurrency, including:
- Answering cryptocurrency questions on Cent, which rewards users with ETH if they provide an answer voted to be one of the best.
- Using “paid-to-click” websites that pay users in cryptocurrency for visiting certain websites or viewing specific ads.
- Using crypto faucets that distribute small amounts of bitcoin or cryptocurrency rewards for visitors who complete a CAPTCHA or specific task.
- Completing micro jobs via a website such as CoinWorker.
The downsides of getting paid in crypto
If you think getting paid in cryptocurrency sounds like a pretty sweet deal, make sure you’re aware of all the risks and potential downsides:
- Volatility. Cryptocurrencies are highly volatile, so the amount you’re paid today could be worth a whole lot less tomorrow. Take bitcoin, for example. On 10/28/17, it was worth $5,769, but by December 18, it had climbed above the $19,000 mark. At the time of this writing (2/13/18), it was hovering around $8,765.
- Gambling. Some critics of getting paid in crypto argue that this approach effectively encourages people to gamble. Due to the highly speculative nature of cryptocurrencies, there’s no way of knowing how much your holdings could be worth in the future.
- Regulatory changes. Cryptocurrencies are still largely unregulated, and legislators around the world are still catching up with the rapid growth of digital currencies. This means there’s always the risk that the value of cryptocurrency holdings, or maybe even their legality in some cases, could be affected by future law changes.
- Tax requirements vary. If you get paid in crypto from an overseas source, you should be aware that the tax treatment of cryptocurrencies varies from country to country. Not only do you need to be aware of how the IRS taxes digital currencies but also how your funds will be taxed in the country where they are earned.
- Still not widely accepted. While cryptocurrencies are becoming increasingly publicized, they’re still not widely accepted as a form of payment, so you may need to exchange your cryptos for fiat currency in order to be able to spend the money you’re paid.
Tax treatment of cryptocurrencies in the US
There are three steps to computing your tax liability stemming from crypto sales:
First, you need to figure out how much profit you made from selling crypto. Multiply the sale price of your crypto by the amount of the coin that you sold. Then, subtract how much you originally paid for the crypto in addition to any fees you had to pay to sell it. This is your tax basis. The figure you end up with is known as a realized gain; that is, your profit.
Next, you need to determine whether your gain is short-term or long-term. Determine the date you purchased your crypto and then note the current date. The period in between is called your holding period; that is, how long you owned it. If you held your crypto for one year or less, it’s considered a short-term gain. If you held it for longer than a year, it’s considered a long-term gain. Your tax rate and liability will depend on whether you had a long- or short-term gain.
Short-term gains are treated as ordinary income; therefore, your tax liability will depend on your particular income range. Find your earnings and multiply your income by the percent designated in the tax bracket. Long-term gains are calculated differently as capital gains, and therefore your tax liability will be calculated using a capital gains tax rate on the profits of your cryptocurrency. It’s worth noting long-term gains offer lower tax liabilities.
Disclosure: At the time of this writing, the author holds IOTA and XLM.
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