April 21, 2022
Cryptocurrency as Compensation: Regulatory Risks
With the “Great Resignation” comes lots of creative ideas on retention & compensation. Some companies are trying to stay ahead of the curve by offering crypto as compensation, but we’re still watching the legal framework develop around this area. Here’s a Hunton Andrews Kurth blog outlining some of the regulatory risks that companies should watch as they consider offering cryptocurrency as compensation:
– Form of Payment – Cash or Negotiable Instrument. The federal Fair Labor Standards Act requires employers to pay minimum and overtime wages in “cash or negotiable instrument payable at par.” This has long been interpreted to include only fiat currencies—monies backed by a governmental authority. As non-fiat currencies, cryptocurrencies therefore fall outside the FLSA’s definition of “cash or negotiable instrument.” As a result, an employer who chooses to pay minimum and/or overtime wages in cryptocurrency may violate the FLSA by failing to pay workers with an accepted form of compensation. In addition, various state laws make the form of wage payment question even more difficult.
– Volatility Concerns. When compared to the rather stable value of the U.S. dollar, the value of cryptocurrencies is subject to large fluctuations…Such volatility can give payroll vendors a nightmare and can, in some instances, lead to the under-payment of wages or violation of minimum wage or overtime requirements under the FLSA.
– Tax and Benefits Considerations. Aside from wage and hour issues, the payment of cryptocurrency implicates a host of tax and benefits-related issues. The IRS considers virtual currencies to be “property,” subject to capital gains tax rates. It has also confirmed in guidance materials that any payment to employees in a virtual currency must be reported on a W-2 based upon the value of the currency in U.S. dollars at the time it was delivered to the employee. This means that cryptocurrency wage payments are subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax. For 401k plan fiduciaries, the Department of Labor recently issued guidance that should serve as a stern warning to any fiduciary looking to invest 401k funds into cryptocurrencies.
– Emily Sacks-Wilner