Cryptocurrency: What’s allowed, what’s not – and what’s coming

The use of digital currency has grown dramatically in recent years, with some businesses already making payments to employees in cryptocurrency. But Finance should use caution.
For starters, the Fair Labor Standards Act (FLSA) regs state that wages must be paid in cash or its equivalent.
So employers might pay bonuses in Bitcoin, Ethereum, Tether, Binance Coin, USD Coin or any of thousands of other types of crypto. However, the FLSA regs don’t allow the payment of base wages using this currency.
Next, payments made for work are considered “wages” for employment tax purposes, the IRS explained in its Frequently Asked Questions on Virtual Currency Transactions. That’s the case no matter what medium is used, even cryptocurrency.
As spelled out in the FAQs, you’d determine the fair market value of the virtual currency measured in U.S. dollars at the time of receipt. Then you’d withhold federal income tax as well as FICA and FUTA taxes. Also, you’d report the wages and withheld taxes on Form W-2.
Another area of caution? Retirement plans. According to the Dept. of Labor’s Compliance Assistance Release 2022-01, fiduciaries should use extreme care before adding a digital currency option to a 401(k) plan’s investment menu.
Digital currency changes to watch
To discuss the risks involved with cryptocurrency, President Biden signed an executive order (EO) on March 9, 2022.
The EO addresses the responsible development of digital assets. It tasks various government agencies, including the Treasury Dept., with submitting several reports.
One report, which is due 180 days from the date of the EO, would cover topics such as:
- the future of money and payment systems, including the conditions that drive broad adoption of digital assets, and
- the extent to which technological innovation may influence these outcomes.
The EO specifically mentions a U.S. central bank digital currency (CBDC), with questions about the relationship between a U.S. CBDC and digital assets administered by the private sector.
Finance will want to keep an eye on the various forthcoming reports and their impact on the future of payments.
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