Token Compensation and Token Payroll: Which countries can you compensate someone entirely in crypto tokens and stablecoins?

March 7, 2024

Token Compensation & Payroll: Countries allowing entirely crypto compensation

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In the United States and many other countries, compensating employees or contractors (“employees”) entirely in crypto tokens, including stablecoins, is legally possible but comes with a range of regulatory, tax, and country-specific considerations.

You can learn more about the potential risks around misclassifying employees or contractors.

Regulatory Considerations

1. Tax Compliance: The IRS treats cryptocurrency as property for tax purposes. Even so, this still means that paying wages in crypto is taxable to the employer and employee, and must be reported by the employer on Form W-2 in U.S. dollars at the fair market value of the cryptocurrency on the date it was paid. Employers must withhold income and payroll taxes in U.S. dollars, so they need to ensure they have enough liquidity to meet these obligations.

Many crypto workers are based in the United States. Learn about how the US taxes tokens and How the IRS’s proposed rule affects U.S. crypto tax compliance

2.  Benefits and Deductions: Certain benefits and deductions (like retirement contributions, health insurance premiums, and tax withholdings) typically require payments in fiat currency. Employers would need to arrange for these transactions to be processed in U.S. dollars, which may complicate payroll administration.

3. Labor Laws: Payments in cryptocurrency must comply with federal and state labor laws, including minimum wage laws. Since the value of cryptocurrencies can be highly volatile, employers need to ensure that the compensation in crypto does not fall below the required minimum wage thresholds when converted to U.S. dollars at the time of payment.

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Other Country-Specific Considerations

European Union: The EU's approach to cryptocurrency is still under development, with some countries being more progressive in their acceptance of crypto for compensation. However, EU member states generally require adherence to tax and labor regulations, with the need to report crypto earnings in Euros for tax purposes.

Japan: Recognized as a leader in cryptocurrency adoption, Japan allows companies to pay their employees in cryptocurrency. However, such arrangements must comply with Japan's tax and labor laws, including proper reporting and tax withholding in Japanese Yen.

Canada: In Canada, using cryptocurrency to pay employees is permissible, but it comes with specific tax implications. The Canadian Revenue Agency (CRA) treats cryptocurrency as a commodity for tax purposes, and employers must report the value of the cryptocurrency in Canadian Dollars at the time of payment and make all regular tax withholding payments in Canadian Dollars.

Australia: Similar to Canada, Australia allows for cryptocurrency compensation, but treats it as property for tax purposes. Employers and employees must follow the Australian Taxation Office (ATO) guidelines for reporting and taxation, including payment of withholding taxes in Australian Dollars.

Learn all about token compensation with Toku's Employer's Guide to Token Compensation.

The Bottom Line

For employees, receiving compensation in cryptocurrency is a taxable event, and the income must be reported in fiat based on the fair market value of the cryptocurrency at the time it is received. Additionally, if employees later sell the cryptocurrency, they will realize a capital gain or loss based on the difference between the value of the cryptocurrency when received as compensation and when it is sold.

Given these complexities, it is advisable for both employers and employees to consult with legal and tax professionals and employment tax administrators who understand crypto before entering into compensation arrangements that involve crypto assets and stablecoins. This ensures compliance with current laws and regulations and helps manage the risks associated with crypto payments.

At Toku, we have realized the risks involved here and can advise organizations on the best approach for efficiency and keeping up with crypto regulations, most importantly, global compliance.

We are the first global compensation and employment solution for Web3. Covering both employees and contractors, our services include crypto-native EOR (Employer-Of-Record), PEO (Professional Employer Organization), and Token grant administration.

Ready to expand your global team without the hassle? Chat with Toku today.