Is cryptocurrency suitable as a remuneration component? Can Bitcoin, Ethereum and Co. replace conventional payments? And how is such remuneration to be treated for tax purposes? In the second part of the blog post, we will look into these and other questions in cooperation with the ba-Group.
In the first part of our article on remuneration through cryptocurrency, we have already introduced you to the general and labor law issues of these forms of remuneration. The second part of the article now deals with the questions that arise with regard to tax law. This publication is produced in cooperation with the tax consultant Arne Keller from the ba group.
Does cryptocurrency count as money?
The tax treatment of cryptocurrencies has not yet been fully regulated, although there are more and more official notices and literature on the subject. The Federal Financial Supervisory Authority (BaFin) treats cryptocurrencies as a so-called unit of account, comparable to foreign exchange. Accordingly, cryptocurrency is not a foreign currency, legal tender, or property. In its basic features, cryptocurrency is more comparable to the granting of shares, because in both cases it is a monetary benefit that accrues to the employee.
Does cryptocurrency count as a benefit in kind?
If cryptocurrencies are made available free of charge or at a reduced price as remuneration for personnel work, it must be checked in each individual case whether it is a cash payment within the meaning of Section 8 (1) EStG ( EStG) or a benefit in kind within the meaning of Section 8 (2) sentence 1 Income Tax Act. According to Section 107, Paragraph 2 of the Industrial Code (GewO), remuneration can also be granted in the form of non-cash benefits if the relevant requirements are met. This is the case if it is in the interest of the employee or the nature of the employment relationship. Although cryptocurrencies are not physical objects within the meaning of Section 90 BGB and are therefore not a classic benefit in kind, they do have a monetary value – albeit a highly variable one – that arises from mutual acceptance within the cryptocurrency user network. Thus, cryptocurrency meets the definition of a benefit in kind, which requires any compensation that is not granted in money or through a non-cash payment.
The decisive factor is whether such an agreement is in the interest of the employee. This is generally the case if the benefit in kind can be used or consumed objectively. This requires a balancing of interests. The comparatively low usability in everyday life speaks against such an interest. However, it could be argued that only those who see a meaningful benefit for themselves agree to payment of the remuneration in cryptocurrency anyway.
Is cryptocurrency the payment method of the future?
This remains to be seen. Many people already see cryptocurrencies as a better means of payment compared to fiat money (name for classic means of payment such as dollars or euros). Since the advent of cryptocurrencies, there has been greater penetration and acceptance by the public and regulators every year, with cryptocurrencies now being held by large institutional investors and governments. For some time now, in addition to everyday purchases (e.g. via crypto credit cards), cryptocurrencies can also be exchanged for fiat money at ATMs. It remains to be seen how long transaction times and the wide range of different cryptocurrencies will influence the development of these as a means of payment in the future. The current fluctuations on the crypto markets, which are caused in particular by the general economic situation, are also triggering some uncertainties here.
Which cryptocurrency has the greatest potential?
The best-known and largest cryptocurrency (in terms of market capitalization) is Bitcoin. There are several thousand other cryptocurrencies – in addition to well-known ones such as Ethereum, Tether, Cardano and Solana, there are also many small currencies with low market capitalization and few transactions. The larger cryptocurrencies have the greatest potential as a compensation component – as there is regularly less volatility here. Due to the constant further development of cryptocurrencies (e.g. Ethereum in particular) in areas such as transaction speed, security and compatibility, more and more “mass suitability” is continuously being produced. This is driven on the one hand by the developers of the networks, but also by the network itself and its users.
Which cryptocurrency is suitable as a salary?
A distinction must be made here as to the background to the payment of cryptocurrencies as a remuneration component. Those (cryptocurrencies) that have a high market capitalization and low volatility are suitable as a remuneration component for a large number of employees. Stable tokens will therefore be more interesting than strongly fluctuating cryptocurrencies, since the risk of price fluctuations will regularly lie with employees or many employers will pass the risk on to them.
In individual cases, more volatile cryptocurrencies are also an option, especially if prices are expected to rise (upside potential) or developers and companies are developing a new cryptocurrency and handing out tokens to employees in the process.
Is cryptocurrency taxed and if so, what are the taxes?
Yes, earnings in cryptocurrencies are also taxed. Both in the case of qualification as a cash benefit and as a benefit in kind, the tax is levied on the employees as wage tax in accordance with Section 38 of the Income Tax Act. The Federal Ministry of Finance recently dealt with individual questions about the (income) tax treatment of virtual currencies and other tokens in its letter dated May 10, 2022. This makes it clear once again that with tokens as benefits in kind, there are tax inflows (and thus taxation) only takes place when they are booked in the employee’s wallet.
This has a particular effect on the evaluation, since this results in an evaluation at the time of inflow (= conversion into euros at the usual final price at the place of delivery), i.e. wage tax on the non-cash benefit. This tariff taxation does not differ from the wage tax on fiat currencies; the time of the assessment is decisive. It must be distinguished from the fact that no capital gains tax is payable on this remuneration component, since this is income from dependent work, i.e. the employment relationship.
It becomes clear that taxation at the time of inflow means that the challenge of “dry income” described above must be taken into account. The tax authorities only accept euros for payroll taxes, so no currency stamps are accepted. If payment is made exclusively in cryptocurrency, part of the cryptocurrency would have to be sold/exchanged for fiat immediately or the euros would have to be made available in some other way to settle the (wage) tax liability. “Dry income” thus describes the problem that tax obligations have to be fulfilled regularly in euros, even if cryptocurrencies, benefits in kind, monetary surrogates or other monetary advantages are the actual remuneration for the employment. It is therefore recommended to retain mixed forms of remuneration, some of which are also paid in euros. These should be clearly and contractually agreed with the employees in advance.
How does the tax office know about cryptocurrency?
The tax office learns about cryptocurrencies through various control mechanisms. Since employers are regularly audited by the tax authorities, they gain insight into the remuneration components during ongoing tax audits or wage tax audits – these are also reflected in the accounting. In addition, many crypto marketplaces require identification upon registration (in some cases even including the tax ID) so that transaction histories and the resulting tax claims can be proven. In order to ensure the taxation process, it can be assumed that the tax authorities/legislators will create the legal basis for retrieving data from marketplaces or wallets. Thanks to blockchain technology, transactions are completely traceable and the taxpayers behind them only have to be assigned once. The tax authorities can also make specific inquiries according to Section 93 of the Fiscal Code (AO) to those involved in the transactions and thus obtain information. In addition, the purchase of data CDs by the tax authorities carries a high risk of detection, as has been the case in the past, for example, with foreign capital gains or AirBnB sales.
What happens if you don’t pay taxes on cryptocurrency?
If cryptocurrencies are not taxed as part of the remuneration, the employer is liable according to § 42d Abs. 1 Nr. 1 EStG for the wage tax that has not been withheld and paid. In the case of non-cash benefits, too, corresponding recording obligations in the wage account must be observed, for non-compliance with which the employer is also liable (e.g. valuation dates and rates).
It is also conceivable that employees do not tax cryptocurrencies, or do so incorrectly, after they have received them as part of their remuneration. Depending on the individual case, this can be careless tax evasion or even tax avoidance, which can be uncovered, for example, in external wage tax audits or in the context of income tax returns. In this case, it is therefore necessary to properly comply with the documentation and declaration obligations. Otherwise, in addition to the taxes subsequently levied, there is a risk of further measures such as fines or criminal proceedings.