Freelancers: should you consider being paid in cryptocurrency?
There is an argument that while cryptocurrency was not the big sha-bang, immediate take-over money make tech bros tried to force on us - it is also not a failure, and remains the ideated future of ‘money’ as we know it. Freelancers saw a rise in payment offers especially for services rendered online, to be delivered in cryptocurrency. Already, in Germany, it is not a good idea because of THE TAX MAN. But why? And how will it look in the future to consider being paid by cryptocurrency?
Firstly, let’s start with defining digital currency - then, cryptocurrency. Essentially, digital currency is a means of value that is transferred in any means not physical - that being in a financial context physical banknotes, cheques, bartered goods and so forth. Cryptocurrency is a digital currency with no central regulatory body where cryptographic methods are used to secure transactions. Cryptocurrencies replace a central regulatory body with a distributed consensus on what transactions have been performed. This is easy enough to understand but the function of cryptocurrency is where people can get lost, and specifically, that is around blockchain or P2P. So, what do these terms mean?
A blockchain is a distributed (decentralized) database, that is, a database that is stored in many copies - one on each node (computer) in a peer-to-peer network. The many copies and a sequence of cryptographic hashes make it difficult or impossible to manipulate the database's change history afterwards. Each event in the database (each database transaction) is stored by adding a so-called block to the database, and a sequence of blocks is therefore called a blockchain.
In the case of cryptocurrencies, the database stores when electronic currency changes owners. In the same fashion when applied to currency, blockchains are used to register ownership of securities and to ensure that electronic lenders, logbooks or journals, especially in decentralized organizations, are not subsequently manipulated.
As mentioned above, cryptocurrency relies on peer-to-peer networks, which is best defined for the laymen's of us (which, at this point, is most of us). The peer-to-peer network, a non-hierarchical network, is a computer network of interconnected nodes that do not communicate according to the client-server model.
This means that different computers are not assigned specific roles in communication and that no nodes have any special privileges over the others, but that all nodes in the network can act in all roles (be a peer). So, in fact, we all use peer to peer networks in some way, or have in the past, it is just understanding their vital application to blockchain that helps.
What is money?
In the EU region, the euro (EUR) is the legal tender. According to the legal requirements, wages/remuneration have to be calculated and paid in Euro. The reason for this is that the legislator wants to ensure that the employee can actually dispose of his wages. An exception to this is only possible if the employee works abroad for more than one month, with it is possible to pay the salary in another currency.
However, this is understood as the currency that is legal tender in the respective country. Although it is indeed termed Crypto "currency", it is not an official currency. They are rather to be classified as a reference to reality. A benefit refers to any donation of an employer to an employee that is a monetary benefit but is not provided in cash. This is regulated in the Industrial Code and allows employers to pay their employees in kind.
However, this only works if the employee agrees. The remuneration can not be paid in full, but only partially in kind. At least the part of the salary that can not be paid out has to be paid out in cash, that is, euros.
Since cryptocurrencies can fluctuate significantly in value, a parallel is drawn to equities. The share of shares in the employee's total remuneration has not yet been finally clarified. According to the legal concept of a decision of the Federal Labor Court would probably be 25-30% admissible and also the remaining portion may not fall below the minimum wage. This limit is probably to accept for cryptocurrencies. It is intended to prevent that too much of the salary, in the end, could be worthless.
It makes sense here, too, to consider remaining within the tax exemption limit for benefits in kind. This is at 44 euros per month. If the value in kind exceeds this limit, the entire value is fully taxed by the employee. According to a new ECJ ruling, the conversion of Euro into cryptocurrencies is in any case VAT-exempt. Should remain below the 44-euro limit, of course, only cryptocurrencies basic tax be paid.
Governments will and mostly do see cryptocurrency as apart of your income and business finances, but, you can not be taxed if it is a stock
This example comes with a warning: it is just an example. How cryptocurrency plays a role in your business will ultimately be defined by your individual circumstances. Laws around this are changing frequently, and vary from country to country. If you want to ensure legality in all tax and financial obligations in relation to cryptocurrency, ensure to seek the advice of a professional.
So, Christoph sells goods in his web shop on the internet. He charges in cryptocurrencies. Christoph records each sale separately in Euro based on the value on the day he is paid in cryptocurrencies. Since cryptocurrencies do not constitute stock in this type of business, Christoph is considered to make his own withdrawal of the cryptocurrencies at the moment he receives them.
In January he posted sales income and VAT totalling EUR 34,500 and during this period he received a total of 0.4 cryptocurrencies which he then takes out and then sells for EUR 36,000. This is to be reported in the appropriate income category. The sales price is EUR 36,000 and is reduced by the cost amount corresponding to the reported amount in the business operations, including VAT, ie EUR 34,500. The capital gain will be EUR 1,500.
If you have received cryptocurrency as payment in your business operations, the subsequent change in value should normally be taxed as income from capital. However, this does not apply in businesses where the cryptocurrency is a stock asset, for example, if you run outward exchange operations. In such cases, you must report the income as income from business activities.
More on Taxation of capital gains
The concept of Capital Gains requires more processing because cryptocurrency is often itself the holding being traded - not your services for payment. First and foremost, the holding period determines the tax liability and secondly, the amount of the profit. Analogous to the private sale of mobile objects, there is a speculative period of one year for cryptocurrencies, on the other hand, the exemption limit of 600 euros.
If the cryptocurrency is traded within one year, taxes will be charged if the profit is 600 euros or more. If you are above the tax threshold with a cent, you have to pay taxes on the total profit. By the way, this exemption limit applies to all private sales of a year and not just to the crypto profits. If taxes start to accrue, the profit, like the regular income, is taxed at the personal income tax rate plus taxes and church tax. If no taxes are incurred, losses and fees will not be tax-deductible.
Consequently, an annual profit remains completely tax-free up to 599.99 euros within the speculation period. On the other hand, the profit is absolutely tax-free, regardless of its amount, if the holding period of the cryptocurrency of one year has been exceeded. Those who want to earn tax-free profits must leave their coins in the wallet for at least 12 months.
Ultimately, though, it is true that the Federal Ministry of Finance has classified cryptocurrencies and all other cryptocurrencies as private money and equated them with "other assets" for tax purposes. If the virtual asset is sold privately, this process falls under the income tax law under § 23 under the private sale transactions. As with the sale of a gold bullion, a vintage car or a work of art, the income in the tax return must be recorded as other income.
Realistically, it is better to rely on proven and solid services like the bank accounts designed for freelancers, like the one available here at Kontist, who are committed to keeping finance for freelancers easy. And we are not just saying that. Here you have read the reasoning behind some decisions around cryptocurrency management and one would have to be in a very strong position to absorb the changes that comes with exchanging goods and services for cryptocurrency. Then, there are bound to be ongoing changes to the taxation and income categories that may affect any system of reporting you do manage to establish. But, with banks now working on blockchain and many banks like Kontist surpassing the limitations of old banking - we can relax knowing our livelihoods can be secured as they are, for some time yet.