In the cryptocurrency sector, paying or getting paid with virtual coins is the norm. While the benefits and advantages of paying with a decentralized currency are getting thinner, there are still reasons why the self-employed Crypto miners should pay themselves as employees.
Let’s take a look.
Self-Employed vs. Business Entity
While self-employed individuals can own a business, they can’t “pay themselves as employees.” Sole-proprietors and single-member LLCs aren’t treated as corporations but as individuals. This means that they’re still regarded as self-employed taxpayers by the IRS.
Although self-employed taxpayers aren’t employees, they can pay themselves as such. However, the cryptocurrency crackdown will treat all virtual currency as property, meaning they’re taxed in a similar way as real estate or stocks, requiring you to pay capital gains tax.
Self-Employed Tax vs. Cryptocurrency Tax
All self-employed individuals must pay self-employment tax and file a 1040 if their net earnings from employment reach $400 or more. After the cryptocurrency crackdown, you’ll either have to claim transactions more than $10,000 and/or earned crypto past $600 every tax year.
President Joe Biden’s cryptocurrency proposal could raise the top tax rate for capital gains from 23.8% to 43.4%. While mining cryptocurrency is considered self-employment in the eyes of the IRS, crypto miners may pay 10%-37% on mining proceeds, not the typical tax rate of 15.3%.
Whether you use a paystub generator or a ledger to pay yourself, it isn’t a great idea to use cryptocurrency to do it. It’s likely cheaper, in the long run, to do your payroll in USD.
Paying Yourself With Cryptocurrency Anyway
If you choose to pay yourself with cryptocurrency, despite the potential tax shortfall, then you need to understand how to do so properly. Here’s how to avoid audits from the IRS.
Previous Tax Years
The IRS is constantly changing how to declare your cryptocurrency earnings. If you declared your cryptocurrency earning is 2019, you had to use a Schedule 1. In 2020 and 2021, you’ll only need Form 1040. If you haven’t declared your crypto income tax at all, the IRS may contact you.
Remember that the self-employed don’t have to separate their personal or business income if they don’t want to. The IRS will ask you to file your business income as self-employed.
How The IRS Tracks Cryptocurrency Tax
If you take out cryptocurrency to pay yourself, you’ll need to have an accurate balance sheet of what each cryptocurrency cost the moment you bought it. You also need to know what your profits were after you sold it, so the IRS can precisely calculate your capital gains tax.
The IRS now tracks who has a crypto wallet, but they aren’t too accurate with the amount you traded. Still, it isn’t a good idea to defraud the IRS. As their technology gets stronger, they’ll be able to know precisely what you owe them, and they won’t have sympathy for “tax dodgers.”
Keep in mind that the IRS will be tracking all the way back to 2013, according to Letter 6173.
Current and Subsequent Tax Years
The beauty of holding a cryptocurrency wallet was how difficult it was to track transactions, but it’s looking like that’ll be a thing of the past. For current and subsequent tax years, you’ll need to pay close attention to the different laws and measures the IRS will take to “get their money.”
Self-employed individuals can still pay themselves via bitcoin wallet apps by transferring cryptocurrency into another wallet or USD currency. You can even ask your clients to pay you with virtual currency, but there aren’t too many businesses that have crypto wallets.
You can find legal jobs that pay in cryptocurrency on crypto job sites, like Crypto Job List, Blocklancer, and PeoplePerHour. These sites specifically market to freelancers.