Giving crypto to employees

Following on from Andrew Ratnasingham’s article ‘Crypto currency in business’ we take a bit of a deeper dive into various employment tax issues that arise where crypto is given to an ‘employee’ by an ‘employer’.

To understand the tax issues, it is necessary to characterise why the crypto is given.

In this article we will assume there is a direct nexus between the person’s employment and the provision of the crypto. Put another way, we will assume the crypto is not given to the person for other reasons, for instance, an air drop where the person receives the crypto not due to their employment but due to their personal crypto investment/trading activities.

Starting with the most common question… can we pay our employees in crypto?

Yes – an employer can potentially do so by agreement with the employee, the question of course is what tax issues result.

Where crypto is given as ‘non-cash’ salary and wages then the tax outcomes are the same as if the amounts were paid in cash (subject of course to the need to value the crypto).

Pay As You Go Withholding obligations, income statement reporting obligations etc would all exist for the employer despite the salary and wages taking a non-cash form.

Does salary sacrificing make a difference?

Yes, where an effective salary sacrificing arrangement is in place it is possible for an employee to forego salary and wages in lieu of receiving benefits (crypto). A useful discussion of salary sacrificing is to be found in TR 2001/10 ‘Income tax: fringe benefits and superannuation guarantee: salary sacrifice arrangements’.

Conceptually, an employee could, under an effective salary sacrifice arrangement, agree to forego prospective salary but instead receive crypto. This should be contrasted to a situation where the remuneration for the employee’s services is agreed to be paid “in money’s worth” (i.e. no salary is agreed to be foregone in lieu of benefits) and as such the payment retains the character of salary and wages.

As crypto is taken to be a form of ‘property’ for tax purposes, the crypto would then be a fringe benefit (a property fringe benefit supported by  ATO TD 2014/28) and subject to FBT as such.

Given the 47% FBT rate, ordinarily there may be no particular income tax advantage to be gained in salary sacrificing for crypto. Where an employer can access FBT exemption or FBT rebate status this could provide an advantage to an employee. However, benefits types other than crypto could equally be the subject of a salary sacrifice agreement.

What if the crypto is on top of salary entitlements?

Where an employer opts to provide crypto to an employee as a benefit and on top of any salary entitlements (e.g. voluntarily conferred by the employer) then it is unlikely to be received as salary and wages and instead would be taxed as a property benefit under the FBT system.

What about super?

Where the crypto is received as salary and wages then superannuation guarantee (‘SG’) would be applicable.

When provided under an effective salary sacrifice agreement or as a ‘benefit’ regard would need to be had to normal superannuation SG rules (whether the crypto is ‘ordinary times earnings’) and/or under the employee’s employment conditions (award or contract).

Under normal SG rules, an amount sacrificed in lieu of crypto benefits or received by way of an ad hoc voluntary gesture by the employer would not be ordinary times earnings and would not attract superannuation.

An employee’s award or employment contract may however dictate superannuation is payable on a ‘gross’ entitlement (before salary sacrifice) and therefore a superannuation entitlement may still exist.

What about other employment on-costs?

With respect to other employment on-costs such as Payroll Tax or Workers Compensation regard would need to be had to the applicable rules under the relevant State/Territory legislation.

In broad terms though, where crypto is provided as non-cash salary and wages, it would be expected the amount will be included as wages/remuneration.

Where the crypto is provided under an effective salary sacrifice arrangement or as a benefit, it will be included under the jurisdictional rules as they apply to including benefits/fringe benefits in the definition of remuneration.

Whilst the specifics of the legislation for the jurisdiction in question should be checked, this is usually done by requiring the taxable value of the benefit to be included as remuneration grossed up using the Type 2 FBT gross up rate, currently 1.8868.

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