Politicians and celebrities have been promoting getting paid in digital assets, mostly bitcoin. When the new mayor of New York City, Eric Adams, collected his first paycheck on January 21, he had it converted to bitcoin and ether, both dominant cryptocurrencies.
But the process is risky and depends on the volatile nature of the cryptos’ rates. Adams, for example, wound up getting paid significantly less because bitcoin had dropped precipitously in price by the time he was paid.
If you choose to get paid in bitcoin or any other digital currency, here are the ins and outs of the process.
How to bank it
“To process your crypto, there are many options depending on your country of residence, tax status, and so on. The easiest way is to sign up to a major cryptocurrency exchange such as Binance, Coinbase (the top US cryptocurrency exchange), or CEX.io, and withdraw your crypto as US dollars, Euros, or another supported currency,” explains Stefan Ateljevic, founder of BitcoinPlay.
“Depending on your geographical location, there may be restrictions on how much you can withdraw, but you can expect to pay a 1 percent to 3 percent fee on your digital coin conversion to fiat currency. This isn’t too bad and is on par with what most banks charge for wire transfers.”
A fiat currency is a national currency not pegged to the price of a commodity such as gold or silver.
You will need to have a crypto wallet to first accept the crypto payment before you do anything else.
“If you are willing to accept crypto as payment, all you need to do is create a crypto wallet to store your earnings. This can be done with Metamask and other simple browser extension wallets that you can set up within minutes,” says Ateljevic.
Keep in mind you will want to make sure your crypto payment is secure.
“The important thing is security, so you will want to create an offline backup wallet, or ‘cold storage,’ which means it’s completely offline and virtually unhackable. So when you receive your funds, you can either store them offline or transfer them to a CEX (Centralized Exchange) to convert them into usable cash,” Ateljevic explains.
How to turn your cryupto payment into dollars when you need it
“The process is very simple. Let’s say you are paid in BTC (Bitcoin); then you would provide your employer with a BTC receiving address. Once you receive your digital coin, then you would transfer it to a major cryptocurrency exchange that has the BTC/USD trading pair, which is the most common,” says Ateljevic.
Your next step, says Ateljevic, is to pass a KYC verification. KYC means “Know Your Customer” or “Know Your Client.” To get verification, go to the official website of any KRA (KYC Registration Agency) or a fund house and fill out the application.
You will need the KYC to sign up and connect your bank account to the exchange.
“Then all you need to do is withdraw your BTC into USD, which can be done in a few clicks, and send it to your USD bank account,” says Ateljevic.
Peer-to-peer (P2P) trading to convert crypto to cash
“In the last few years, there has been substantial growth in P2P crypto trading, especially in emerging crypto hot spots such as Kenya, Nigeria, Colombia, and Peru,” offers Michael Foster, co-founder of peer-to-peer crypto marketplaces LocalCryptos.
“P2P marketplaces offer the best payment flexibility imaginable when converting crypto to cash. Because these marketplaces connect buyers and sellers to exchange with each other directly, suddenly hundreds of payment methods become available, including mobile money services such as M-PESA, direct bank transfers, PayPal, Venmo, and more.”
Avoiding tax problems
Getting paid in crypto could also cause some infusion at tax time since your crypto payment amount might differ from your salary. But there are steps you can take to avoid tax problems.
“Create an employee contract or memorandum of understanding [MOU] if you so choose, that states what your ‘true income’ is and that you are being paid totally and completely with cryptocurrency in lieu of that amount of dollars,” offers tax attorney Brad Biren, who can be found on his website as DrTaxRefund on IQMOP.com
Doing this will help calculate your withholding taxes, such as FUTA and FICA.
Now, if you do not want to redeem your crypto for cash now as you think it will increase in value, put it into an IRA, says Biren.
“IRAs defer taxes, so you can avoid the issue of redeeming your NTFs now and allow them to safely accrue value until retirement. That MOU you created is now proof of its value when you earned it,” notes Biren.