Is getting paid in Bitcoin really liberating?

30 August, 2019

Every now and again a cryptocurrency enthusiast with a public forum will float the idea that everyone should be paid in Bitcoin. As the thinking goes, paying salaries in Bitcoin would truly liberate workers by freeing them from the taxman and the burdens that come with the traditional banking system. But would that truly be the case? Is getting paid in Bitcoin really as liberating as some would have us believe?

Like most other things related to cryptocurrency, the answers to these questions are not absolute. Yes, there are plenty of extreme opinions on both sides. Yet the truth is found somewhere in the middle. Whether or not being paid in Bitcoin is individually liberating would depend on individual circumstances. In terms of liberation from the taxman though, don't hold your breath.

The taxman WILL get his

Sead Fadilpasic pointed out in a brilliant piece published by Cryptonews on August 23 that taxing authorities are starting to pay close attention to Bitcoin salary payments. He specifically mentioned New Zealand and the UK, where such payments are considered regular income as long as recipients can use their tokens to make routine transactions or convert them to fiat.

For all intents and purposes, New Zealand and the UK don't view salaries paid in Bitcoin as any different from those paid in fiat. Workers in those countries electing to be paid in Bitcoin must still report all of their wages as normal. They must pay all income taxes as normal too.

Things in the US are pretty much the same. Since the US does not consider Bitcoin legal tender, employers could not report wages in BTC, so they must report them in USD (US dollars). Employer records go directly to the IRS and state taxing authorities on a quarterly basis. This reality dictates that employees could not get away with misreporting their income based on receiving a portion of their pay in BTC. Taxing authorities would still know how much they made and extract the appropriate income taxes.

In short, the taxman will get his due one way or the other. Expecting BTC salary payments to liberate workers from income taxes is just foolish thinking.

Where this thinking comes from

Common sense dictates that governments are not going to give up tax revenues to cryptocurrencies. So where does this thinking come from? Why do people assume that being paid in Bitcoin will liberate them from the taxman? It is a matter of looking back in history.

There was a time in almost every culture in which wealthy landowners and feudal kings controlled all of labour done in their local areas. Many of them paid their workers in customised tokens that were only good on their property. Because those tokens were not considered real money, they were out of bounds for taxing authorities. Tax collectors were not about to take coins they could not use.

In that sense, the customised tokens did liberate workers from the taxman. But it came at a cost. The tokens could only be redeemed for goods and services provided by the landowner. As such, workers were effectively enslaved by their feudal lords due to an inability to spend their wages elsewhere.

It is only due to an ignorance of history that some cryptocurrency enthusiasts believe Bitcoin salary payments would allow one to escape taxes. The only way escaping the taxman would be possible is to not report earnings of all. But no one needs Bitcoin to do that. One only needs a willingness to keep his/her mouth shut and take his/her chances (not that we condone this, obviously).

Liberty from traditional banking

Now that we have settled the tax question, let us turn our attentions to Bitcoin salary payments as a means of liberating people from traditional banking. This concept is considerably more plausible. In theory, one could completely liberate him/herself from the traditional financial system by relying entirely on Bitcoin. Note the word 'theory' here. The concept has never been proven beyond reasonable doubt.

In order for such liberation to work, an employee would first have to arrange all salary payments in Bitcoin. That is a major hurdle in itself. But let us assume his/her employer agreed to the arrangement. At the conclusion of every pay cycle, the employer would push coins to the employee's wallet and that would be that. Then what?

There are a couple of options here. First, the employee could just let things ride. He could leave his BTC alone and only use it when he needs to buy things. That doesn't seem to make sense given Bitcoin's price volatility. Another approach is to convert his BTC into either fiat or a stablecoin.

If he goes the fiat route, he is not truly liberating himself from traditional banking. That leaves the stablecoin route. Converting BTC to a stablecoin would protect its value from any imminent price drops. But those tokens would have to be converted back to BTC in order to make purchases.

All of this converting back and forth is likely to incur fees of some sort. Are those fees worth it in order to liberate oneself from the traditional banking system? That would depend on the reasons for seeking such liberation.

From the employer's perspective

Thus far we have discussed Bitcoin salary payments from the employee's perspective. We cannot forget about the employer, though. There are a number of factors that have to be considered from that perspective as well. First among them is the employer's legal responsibility to pay employees whatever they are due.

Most countries in the developed world have laws in place requiring employers to guarantee full wages are paid. Let's use the U.S. as an example. Federal law requires American employers to pay every penny due on the established payday. Simple enough. But what if an employer wants to pay workers with what is known as a payroll card?

A payroll card is more or less a prepaid debit card through which workers can receive their salaries. Numerous states have taken issue with these cards, especially when employees are charged a fee for using them. Those states have put a stop to such practices by reminding employers of their legal requirement to pay every penny due.

If an employee is forced to accept pay via a payroll card and then must pay fees to use the card, US law dictates that this person is not receiving full pay. Therefore, employers are not allowed to force payroll cards on their workers. The very same thing could end up happening with Bitcoin.

Price fluctuations

Another big problem for employers is those price fluctuations we have already talked about. In order to pay employees with BTC, employers have to keep enough BTC in their own accounts. Price volatility makes this too risky. So employers would end up having to purchase BTC on payday, then make salary payments as quickly as possible before they are harmed by moving prices.

Not only would this require near perfect timing, it would also incur additional charges for the employer. Those charges would come in the form of trading fees incurred when fiat is converted to BTC. Employers are not likely to absorb those fees just to make salary payments more convenient to workers. It is more reasonable that they would pass those fees on to employees under a voluntary arrangement. Those who did not want to pay the fees would continue to receive their salary through traditional means.

A theoretical exception

As previously stated, it is theoretically possible to receive one's salary exclusively in BTC to liberate yourself from the banking system. It is also theoretically possible for an employer to pay in BTC without incurring any charges or worry about price fluctuations.

Fadilpasic demonstrated as much with another example cited in his article. This example involves a software developer who lives on the Isle of Man. He is employed by CoinCorner, a British-based exchange also located on the Isle of Man.

Already being involved in the cryptocurrency business makes it easy for CoinCorner to pay employees in BTC without incurring too much hassle. As for the financial risks, it is no big deal for an exchange that makes its money off that risk. As for the employee, he can freely exchange his coins at will on the exchange he works for.

This particular example proves the theory. But it is not practical for the average person on the street. A relatively small number of employees around the world work for cryptocurrency exchanges. So what works for this software developer on the Isle of Man wouldn't work for the vast majority of employees around the world.

In a perfect world, we could all be paid in whatever fiat or crypto we fancied. But this is not a perfect world. Furthermore, there are too many constraints right now to BTC salary payments. Until those constraints are adequately dealt with, being paid in BTC is only a workable solution for a small number of people. The rest of us have to rely on fiat and the traditional banking sector to get our salaries.