Bitcoin’s latest plunge highlights the dangers of a crypto salary

When was the last time your entire paycheck shrank by more than 20%?

If you are being paid in Bitcoin, the answer was Saturday, when the token fell as much as 21% in a matter of hours. While it has recovered ground, Bitcoin is still down more than 25% from the record high it reached about a month ago. That rapid plunge highlights just one peril of a nascent trend that’s being hyped up by politicians and celebrities — being paid in digital currencies.

With major U.S. cities competing for investments in the fast-growing blockchain industry, their leaders are increasingly trying to promote policies that help more people get at least a part of their salary in crypto.

Miami Mayor Francis Suarez said last month he would take his next paycheck “100% in Bitcoin” and has announced that he is working on a plan to pay the city’s more than 4,000 employees in cryptocurrency. Not only that, residents would be able to pay fees and taxes in Bitcoin, he told Bloomberg Television in an interview earlier this month.

Angel Garcia/Bloomberg

Not to be outdone, New York City Mayor-elect Eric Adams says he’s exploring ways in which all the millions of people working in the largest U.S. city could be paid directly in Bitcoin and other cryptocurrencies. He himself said last month that he would take his first three paychecks in Bitcoin. Professional athletes Russell Okung, Odell Beckham Jr and Aaron Rodgers have all said they will be paid at least in part in crypto. The number of Bitcoin ATMs in the U.S. has soared 577% to about 28,500 over the past two years, according to Coin ATM Radar.

Despite the risks, proponents cite the possibility of big gains as mainstream investors increasingly plow into the space. Crypto can certainly drop, they say, but so too can it catapult to levels higher than you’d ever expect from any annual raise in a fiat-denominated salary.

“We may not be very far from a world in which this is an option that’s offered by employers,” said Cathy Barrera, founding economist of Prysm Group and program director of the Wharton Economics of Blockchain and Digital Assets program at the University of Pennsylvania. “Whether or not employees decide to take up that offer is a completely different question.”

So in case that moment ever comes at the company where you work, Bloomberg News talked to experts about the most important things to know before making a decision:

Control the calculation

One of the biggest allures of being paid in a prominent cryptocurrency is, of course, growth potential. Over the past decade, the price of a single Bitcoin has skyrocketed from several dollars to well over $45,000, even after the latest drop. Given surging growth this year, someone who was paid a lump sum of $100,000 in Bitcoin on Jan. 1 and managed to hold the whole time would — even after the dip — now be sitting on roughly $170,000. Those are serious returns.

But one of the main rules of investing is that past performance is not indicative of future results. Yes, Bitcoin has been on an incredible upward climb. But as this weekend’s dip shows, the crypto and its peers are notoriously volatile. The largest digital token spiked 80% in February, only to fall another 20% within a week, and rise another 30% two weeks later. In May, the currency tumbled 42% and in late November, Bitcoin fell over 8% in a single day. For someone with $100,000 in Bitcoin, that would amount to an $8,000 loss in one day.

To be sure, most people receive their salaries in smaller disbursements over the course of the year. This can mitigate some of the severe drops of a crypto paycheck by spreading out potential gains and losses over time. Yet it still leaves a lot of questions to be answered. For instance: What happens if there is a major price change between the last day of your pay period and the day you receive your paycheck?

“You might be making it out like a bandit,” said Mati Greenspan, founder and CEO of Quantum Economics. But if prices retreat, “you might also be shooting yourself in the foot.”

To manage such uncertainty, Greenspan recommends stipulating a fiat-denominated amount of crypto compensation in your contract. That would be in your local currency, such as dollars, pounds or euros. Instead of receiving 0.05 Bitcoin every pay period, your contract would indicate that you’d receive $3,000 in Bitcoin at its price at a specified time. This would take out some of the upside if Bitcoin surges, but would ensure a more stable salary over time.

Still, it’s also important to remember that not all coins behave in the same way, and such a contractual stipulation could lock you into a token that ends up taking an unexpected turn from its peers. This weekend, for instance, Bitcoin and Ether both dropped, but the former actually underperformed the latter. Analysts indicate this may be because of Bitcoin’s links to larger macro trends in the economy versus Ether’s connection to decentralized finance and non-fungible tokens. Even a year ago, this divergence would not have been quite so clear.

Plan your tax strategy early

Crypto compensation simplifies pay in a lot of ways. You could theoretically cut out your bank as a middle man. Transfers are quick and transparent, a boon if your employer is in a foreign country.

Taxes are a different story. In the U.S., the Internal Revenue Service treats virtual currencies as property, meaning their tax status resembles that of stocks or bonds, rather than of cash. As such, recipients owe ordinary income tax on whatever the fair market value of the coins is when they receive them, according to Lisa Zarlenga, a partner in Washington, D.C. at the law firm Steptoe & Johnson LLP. Recipients also face capital gains taxes when they sell or swap the coins for other digital currencies.

Complicated taxation calculations are one reason why crypto paychecks can be a headache for both employers and employees.

“There’s always a difference between how much the employer paid for that coin versus the market value at the time they’re dispensing it as salary because the price changes,” said Shehan Chandrasekera, head of tax strategy for CoinTracker, a company that helps people manage and calculate taxes from their cryptocurrency transactions. This can also cause complications for employees who receive crypto directly from their employees’ crypto wallets.

“At that point the employee is on the hook to figure out the date you received the coin and the market value of when you received the coin,” he said.

Several software tools can help you keep track of crypto transactions for accounting purposes. They include CoinTracker, TokenTax, Taxbit and Bittax. To simplify the process, people should keep track of their cost basis (the value of the cryptocurrency the day you got paid in it) in a spreadsheet, according to Jaimin Desai, founder of Reconcile, a capital gains tax app for equities and crypto traders. Most brokerages don’t help crypto investors keep track of all of their cost basis so it’s difficult to know how much gain or loss you’ve made on various transactions, he said.

“Whenever you buy, sell, convert, receive an airdrop, or participate in yield farming, I recommend noting key information like date of transaction, purchase price, sell price, and quantity bought or sold,” Desai said. “This will help you or an accountant properly calculate the net gains or losses that are susceptible to capital gains tax.”

It’s a cumbersome process. But experts say consumers — even those hopeful for a decentralized future — need to be mindful of the IRS, which has started cracking down on people who have not reported crypto transactions.

Assess your risk appetite

Do you make as much as a famous athlete? If not, taking your full salary for a year or even a few months in Bitcoin likely poses a greater risk to you. A (financially responsible) celebrity paid millions of dollars over the years would have had time to sock away cash, property and other assets. That would make significant losses — even an entire year’s pay — easier to withstand in the event of a bear market.

This doesn’t mean you should forgo a crypto paycheck entirely. Edward Moya, senior market analyst at Oanda, estimates someone making $100,000 could consider splitting 20% of their salary in cryptos and stocks, assuming that 80% is going to housing, food, utilities and transportation costs. After all, some employees already get paid in a mix of stock and cash options.

But given the volatility of crypto, people who want to get paid in crypto and are retiring within the next decade at most should consider a mid-single digit percentage of their paycheck, Moya said. Those who are young and have minimal financial responsibilities should consider investing no more than a quarter of their paychecks in crypto, he said.

Another risk: acceptance. Some early Bitcoin supporters hoped the crypto would become a common means of payment. While more retailers have started accepting Bitcoin, it’s still far from a universal currency and more widely considered a store of value. What’s more, each time you pay for something in Bitcoin, you face fees. Lately, fees have been south of $10, but the average fee can reach up to $60, according to data provider Bitinfocharts. Higher fees usually emerge when the blockchain, which offers limited space for transactions, is congested.

Regulation poses other challenges. Securities and Exchange Commission Chair Gary Gensler has labeled crypto as the “Wild West” and signaled that he wants more robust oversight of the markets. Changes in the regulatory environment, especially as lawmakers address crypto’s growing impact, could throw even more curveballs and increase volatility, according to Moya.

“No one has a firm handle on where prices are going and given the tremendous amount of regulatory uncertainty you could easily see factors come out of left field that would lead easily to a 50% drop in the value of Bitcoin over a very short period of time,” Moya said.

So… should you be paid in Bitcoin?

The verdict will vary widely depending on age, wealth, location and risk tolerance. But experts generally advise caution, especially if you’re considering taking big proportions of your paycheck in crypto.

“It’s closer to thinking about taking some of your salary and putting it directly into a retirement account than it is thinking about taking your salary sort of in a different currency,” said Barrera of Wharton. Those skewing toward retirement might prefer keeping their assets more diversified and perhaps less risky, she said.

Keen investors might consider handling conversions to crypto themselves. Quantum Economics’ Greenspan says employees might simply opt to convert a portion of their salaries manually into crypto each pay period. That’s a bit less streamlined than being automatically paid in crypto, but he says it would allow for more control over when — and if — you convert.