Is cryptocurrency suitable as an element of remuneration? Can Bitcoin, Ethereum and Co. replace conventional remuneration? And how to tax such a form of compensation? We explore these and other questions in our second part of the blog post in collaboration with ba-Group.
In the first part of our article on remuneration by crypto-currency, we had already presented the general issues and labor law issues related to these forms of remuneration. The second part of the article now deals with issues that arise in tax law. This publication is produced in collaboration with tax advisor Arne Keller of ba-Group.
Does cryptocurrency count as money?
The treatment of cryptocurrencies under tax law is not yet fully regulated, although there is a growing body of administrative guidance and literature on the subject. The German Federal Financial Supervisory Authority (BaFin) treats cryptocurrency as a so-called unit of account, comparable to foreign exchange. Accordingly, cryptocurrency is not foreign currency, legal tender or property. In its basic characteristics, cryptocurrency is rather comparable to the allocation of shares, since in both cases it is a monetary benefit that accrues to the employee.
Does cryptocurrency count as non-monetary compensation?
If cryptocurrencies are provided free of charge or at a reduced price as remuneration for the work of staff, it should be examined on a case-by-case basis whether it is a cash payment within the meaning of Article 8 paragraph 1, of the German income tax law ( EStG) or a payment in kind within the meaning of § 8, paragraph 2, sentence 1 of the EStG. Pursuant to Section 107(2) of the Trade, Commerce and Industry Regulation Act (GewO), remuneration may also be granted in the form of benefits in kind if the required conditions are met. This is the case if it corresponds to the interest of the employee or to the nature of the employment relationship. Although cryptocurrency is not a physical object within the meaning of Section 90 of the German Civil Code (BGB) and therefore not a classic payment in kind, it has a monetary – albeit highly fluctuating – value that derives from the mutual acceptance within the user network. Thus, cryptocurrency meets the definition of compensation in kind, which requires any compensation that is not given in money or by a monetary payment other than cash.
The decisive factor is whether such an agreement is in the interest of the employee. This is in principle the case if the remuneration in kind can be used or consumed objectively. This requires a weighing of interests. The relatively low ease of use in everyday life runs counter to such interest. However, it could be argued for this that only those who see a significant benefit to themselves accept the payment of compensation in cryptocurrency anyway.
Is cryptocurrency the payment method of the future?
That remains to be seen. Many people already see cryptocurrencies as the better means of payment compared to fiat money (a term for traditional means of payment such as dollars or euros). Since the emergence of cryptocurrencies, there has been greater penetration and acceptance by the public and regulators year on year, so that cryptocurrencies are now also held by large institutional investors and governments. . For some time now, in addition to common purchases (for example, via crypto credit cards), cryptocurrencies can also be exchanged for fiat currency at ATMs. It remains to be seen how the partially long transaction times and the large supply of different cryptocurrencies will influence the development of these as a means of payment in the future. The current fluctuations in the crypto markets, which are caused in particular by the general economic situation, also give rise to certain uncertainties here.
Which cryptocurrency has the greatest potential?
The most well-known and largest cryptocurrency (in terms of market capitalization) is Bitcoin. There are several thousand other cryptocurrencies – in addition to the well-known ones such as Ethereum, Tether, Cardano and Solana, there are also many small currencies with low market capitalization and few transactions. The biggest cryptocurrencies have the greatest potential as an element of remuneration – because there is regularly less volatility here. Thanks to the constant development of cryptocurrencies (eg in particular Ethereum) in areas such as transaction speed, security and compatibility, an ever greater “mass fit” is continuously 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 for salary?
Here it is necessary to distinguish what is the context of the payment of cryptocurrencies as a component of remuneration. As an element of compensation for a large number of employees, those (cryptocurrencies) with a high market capitalization and low volatility are suitable. Thus, stablecoins will be more attractive than cryptocurrencies that fluctuate widely, since the risk of price fluctuations will regularly fall on employees or many employers will pass the risk on to them.
In individual cases, more volatile cryptocurrencies will also come into question, especially if bets are placed on rising prices (upside potential) or if developers and companies develop a new cryptocurrency and issue tokens to employees in this context.
Is cryptocurrency taxed and if so, how much are the taxes?
Yes, remuneration in crypto-currencies is also taxed. Whether it is a cash benefit or a benefit in kind, the tax is levied on employees as wage tax according to § 38 of the German tax law on income (EStG). The Federal Ministry of Finance recently addressed individual questions regarding the (income) tax treatment of virtual currencies and other tokens in its letter of May 10, 2022. This clarifies once again that in the case of tokens as remuneration in kind, the tax inflow (and therefore taxation) only takes place when they are accounted for in the employee’s portfolio.
This has a particular impact on the valuation, because it means that a valuation takes place at the time of entry (= conversion into euros at the usual final price at the place of delivery), which means that the wage tax is calculated on the non-cash benefit. This taxation according to the tariff does not differ from the tax on salaries on fiat currencies; what is decisive is the moment of the evaluation. A distinction must be made between this and the fact that no capital gains tax is due on this component of the remuneration, since it is income from work, i.e. of the employment relationship.
It becomes clear that taxation at the time of entry means that the challenge of “dry income” described at the beginning must be taken into account. The tax office only accepts euros for social charges, so no currency tokens are accepted. If an exclusive payment is made in cryptocurrency, then part of the cryptocurrency should be sold/exchanged for fiat immediately or the euros should be provided in another way to settle the tax burden (on wages). “Dry income” thus describes the problem that tax obligations must regularly meet in euros, even if cryptocurrencies, non-monetary benefits, monetary substitutes or other monetary benefits are the actual remuneration of employment. It is therefore recommended to maintain mixed forms of remuneration also partially paid in euros. These must be clearly and contractually agreed in advance with the employees.
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 elements during ongoing company audits or external payroll tax audits – these are also mapped in the accounts . Additionally, many crypto exchanges require identification upon registration (in some cases even the tax ID number), so that transaction history and resulting tax claims can be proven. In order to secure the tax procedure, 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 fully traceable and the taxpayers behind them only need to be affected once. The tax authorities may also carry out targeted inquiries in accordance with Section 93 of the German Tax Code (AO) of the persons involved in the transactions and thus obtain information. In addition, the purchase of data CDs by the tax authorities poses a high risk of discovery, as has been the case in the past, for example, with foreign investment income or AirBnB sales.
What happens if you don’t pay cryptocurrency tax?
If cryptocurrencies are not taxed as part of remuneration, the employer is liable for the undeducted and paid wage tax according to § 42d (1) No. 1 EStG. In addition, in the case of non-cash remuneration, corresponding recording requirements must be observed in the payroll account, for which the employer is also responsible if they are not met (e.g. dates and evaluation rate).
It is also conceivable that employees do not pay tax on cryptocurrencies or tax them incorrectly after they have been received as part of their compensation. Depending on the case, this may constitute reckless tax evasion or even tax evasion, which may be discovered, for example, during external payroll tax audits or in the context of income tax declarations. In this case, it is therefore necessary to comply with the documentation and declaration obligations. Otherwise, in addition to taxes levied later, there is the threat of further action such as penalties or criminal prosecution.