In the first part of our article on compensation by cryptocurrency, we already introduced you to the general and labor law issues related to these forms of compensation. The second part of the article now deals with the questions that arise with regard to tax law. This publication is made in cooperation with tax consultant Arne Keller from ba-Group.
Does cryptocurrency count as money?
The handling of cryptocurrencies under tax law is not yet fully regulated, although there are more and more administrative instructions 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 a foreign currency, legal tender or property. In its basic features, cryptocurrency is rather comparable to the granting of shares, because in both cases it is a monetary benefit that accrues to the employee.
Does cryptocurrency count as non-cash compensation?
If cryptocurrencies are provided free of charge or at a reduced price as remuneration for the work of personnel, it must be examined in each individual case whether this is a cash payment within the meaning of Section 8 (1) of the German Income Tax Act (EStG) or a payment in kind within the meaning of Section 8 (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 relevant requirements are met. This is the case if this corresponds to the interest of the employee or 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 thus not a classic payment in kind, it does have a monetary value - albeit one that fluctuates greatly - that arises through mutual acceptance within the user network. Thus, cryptocurrency meets the definition of remuneration in kind, which requires any remuneration that is not granted in money or by a non-cash monetary payment.
The decisive factor is whether such an agreement is in the interest of the employee. In principle, this is the case if the remuneration in kind can be used or consumed in an objective manner. This requires a weighing of interests. The comparatively low usability in everyday life speaks against such an interest. However, it could be argued in favor of this that only those who see a meaningful benefit for themselves agree to payment of the remuneration in cryptocurrency anyway.
Is cryptocurrency the payment method of the future?
This remains to be seen. Many people already see cryptocurrencies as the better means of payment compared to fiat money (term for classic 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 from year to year, so that cryptocurrencies are now also held by large institutional investors and governments. For some time now, in addition to everyday purchases (e.g., via crypto-credit cards), cryptocurrencies can also be exchanged for fiat money at ATMs. It remains to be seen how partly 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 on the crypto markets, which are caused in particular by the general economic situation, trigger some uncertainties here as well.
Which cryptocurrency has the greatest potential?
The best known and largest cryptocurrency (in terms of market capitalization) is Bitcoin. There are several thousand other cryptocurrencies - in addition to well-known ones such as Ethereum, Tether, Cardano and Solana, there are also many small currencies with low market capitalization and few transactions. The larger cryptocurrencies have the greatest potential as a compensation component - as there is regularly less volatility here. Through the constant further development of cryptocurrencies (e.g. in particular Ethereum) in areas such as transaction speed, security and compatibility, an ever further "mass suitability" 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 background of the payment of cryptocurrencies as a component of remuneration. As a remuneration component for a large number of employees, those (cryptocurrencies) that have a high market capitalization and low volatility are suitable. Thus, stable tokens will be more interesting than cryptocurrencies that fluctuate significantly, since the risk of price fluctuations will regularly lie with the 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 developers and companies develop a new cryptocurrency and issue tokens to employees as part of this.
Is cryptocurrency taxed and if so, how much are the taxes?
Yes, remuneration in cryptocurrencies is also taxed. Both when qualified as a cash benefit and as a benefit in kind, the tax is levied on employees as wage tax in accordance with Section 38 of the German Income Tax Act (EStG). The Federal Ministry of Finance recently dealt with individual questions regarding the (income) tax treatment of virtual currencies and other tokens in its letter dated May 10, 2022. This clarifies once again that in the case of tokens as remuneration in kind, the tax inflow (and thus the taxation) only takes place when they are booked into the employee's wallet.
This has a particular impact on the valuation, as this means that a valuation takes place at the time of inflow (= conversion into euros at the usual final price at the place of delivery), which means that wage tax is calculated on the non-cash benefit. This taxation according to the tariff does not differ from the wage tax on fiat currencies; what is of decisive importance is the time of valuation. A distinction must be made between this and the fact that no capital gains tax is payable on this component of remuneration, since it is income from employment, i.e. the employment relationship.
It becomes clear that the taxation at the time of inflow means that the challenge of "dry income" described at the beginning must be taken into account. The tax authorities only accept euros for payroll taxes, so that no currency tokens are accepted. If an exclusive payment is made in cryptocurrency, a part of the cryptocurrency would then have to be sold/exchanged for fiat immediately or the euros would have to be provided in another way to settle the (payroll) tax liability. "Dry income" thus describes the problem that tax obligations must regularly be met in euros, even if cryptocurrencies, non-cash benefits, monetary surrogates or other monetary benefits are the actual remuneration for the employment. It is therefore recommended to maintain mixed forms of remuneration that are also partially paid in euros. These should be clearly and contractually agreed with the employees in advance.
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 components during ongoing company audits or external wage tax audits - these are also mapped in the accounts. In addition, many crypto marketplaces require identification upon registration (in some cases even including the tax ID), so that transaction histories and resulting tax claims can be proven. In order to ensure the taxation procedure, it can be assumed that the tax authorities/legislators will create the legal basis for retrieving the data from marketplaces or wallets. Due to the blockchain technology, transactions are completely traceable, and the taxpayers behind them only have to be assigned once. The tax authorities can also make targeted inquiries in accordance with Section 93 of the German Fiscal Code (AO) to those involved in the transactions and thus obtain information. Furthermore, the purchase of data CDs by the tax authorities poses a high risk of discovery, as has already been the case in the past, for example, with foreign investment income or AirBnB sales.
What happens if you don't pay tax on cryptocurrency?
If cryptocurrencies are not taxed as a component of remuneration, the employer is liable for the wage tax not withheld and paid pursuant to Section 42d (1) No. 1 EStG. Also, in the case of non-cash remuneration, corresponding recording requirements must be observed in the payroll account, for which the employer is also liable should these not be/be fulfilled (e.g. valuation dates and rates).
It is also conceivable that employees do not pay tax on cryptocurrencies or do not pay tax on them correctly after they have been received as part of their remuneration. Depending on the individual case, this may constitute reckless tax evasion or even tax avoidance, which can be discovered, for example, during external wage tax audits or in the context of income tax returns. In this case, it is therefore necessary to properly comply with the documentation and declaration obligations. Otherwise, in addition to the subsequently levied taxes, there is the threat of further measures such as penalties or criminal proceedings.
Contribution in cooperation with Arne Keller (Partner ba-Group), Julia Viohl, Dr. Sabine Vianden, Maria Rutmann