Expert Q&A: Bitcoin Compensation | Practical Law

Expert Q&A: Bitcoin Compensation | Practical Law

An expert Q&A with David A. Prather of Ford & Harrison LLP on compliance with state and federal wage and hour law for employees paid with convertible virtual currencies such as Bitcoin. The Q&A also discusses IRS Notice 2014-21, which explains how federal tax laws apply to transactions using convertible virtual currencies such as Bitcoin.

Expert Q&A: Bitcoin Compensation

Practical Law Article 0-573-7085 (Approx. 6 pages)

Expert Q&A: Bitcoin Compensation

by Practical Law Labor & Employment
Law stated as of 08 Jul 2014USA (National/Federal)
An expert Q&A with David A. Prather of Ford & Harrison LLP on compliance with state and federal wage and hour law for employees paid with convertible virtual currencies such as Bitcoin. The Q&A also discusses IRS Notice 2014-21, which explains how federal tax laws apply to transactions using convertible virtual currencies such as Bitcoin.
Digital currency is gaining popularity both as an investment and as payment for goods and services. Bitcoin is probably the best known example of digital currency. Major retailers such as accept Bitcoins as payment, and some employees in the US and elsewhere are paid in Bitcoins. A legal and regulatory framework for Bitcoin compensation has yet to be established, and employers still must comply with state and federal employment laws. Practical Law reached out to David Prather for his thoughts on Bitcoin compensation.
David is a partner in Ford & Harrison LLP's Memphis, Tennessee office. He co-chairs the wage and hour practice group. David is a former Senior Advisor to the Administrator of the Wage and Hour Division of the United States Department of Labor and is a member of the US Chamber of Commerce Labor Relations Committee.

What is "Bitcoin"?

Bitcoin is a convertible virtual currency. A virtual currency is basically a digital representation of some value and is also referred to as digital cash or "cryptocurrency." Virtual currency exists only online, there is no tangible equivalent to coins or paper bills. Virtual currency, like Bitcoin, is considered convertible when it can be bought or sold for real currency or accepted as a substitute for real currency.
Bitcoins are bought, sold and traded online at an exchange rate determined by market supply and demand. Instead of a bank account or credit card, Bitcoins are sent and received through an online "wallet," a computer program or app users download to manage their Bitcoin transactions. Multibit and Hive are examples of Bitcoin wallets. Some users, including online retailers like, obtain Bitcoins by accepting them as payment for goods and services. Users can also obtain Bitcoins by purchasing them through online exchanges, such as, with a bank account, wire transfer or credit card, or by purchasing them with cash from another person with a Bitcoin wallet.
Users can also obtain Bitcoins by "mining" them. Bitcoin mining involves using special software to solve complex math problems and receiving a certain number of Bitcoins in exchange. Anyone with the software and computing power can mine Bitcoins and sell or trade the Bitcoins they generate. Because of a fixed cap, only 21 million Bitcoins will ever exist, and more than half have already been mined.
Bitcoin wallets and transactions are nearly anonymous because they are highly encrypted. Bitcoin wallets are assigned an "address" that is analogous to an e-mail address and identified only by a series of letters and numbers. Each Bitcoin transaction is also assigned a series of letters and numbers, time and date stamped, and posted on a public ledger. The public ledger is shared with every device on the Bitcoin network, so any user's computer or smartphone can verify the validity of each transaction. Bitcoin transactions can be viewed at As a result, the movement of Bitcoins is somewhat transparent, but the parties are not.
One of the advantages of Bitcoins is that the risk of data and identity theft is less than with credit card and bank transactions because Bitcoin transactions are highly encrypted and do not include identifying information or account numbers. Another advantage is cost savings. Bitcoin transactions involve little or no fees, so consumers avoid foreign transaction fees and low-margin online sellers benefit from lower overall transaction costs. Bitcoin wallets and exchanges, however, are vulnerable to fraud and hackers, and security breaches are not insured like they would be in FDIC-backed institutions. Also, Bitcoins are not readily converted to US currency, the exchange rate tends to be volatile and there is no central bank or regulatory scheme for Bitcoin transactions.

What is the IRS's current position on Bitcoins as wages?

General employment tax principles provide that the value of property given as payment for services performed constitutes W-2 wages for employees and 1099 income for independent contractors. In addition, the fair market value of that property, as of the date it was received, is subject to federal income tax withholding, FICA, FUTA and the self-employment tax.
In March 2014, the IRS issued IRS Notice 2014-21, addressing the federal tax consequences of convertible virtual currency transactions, including the receipt of Bitcoins as payment for services. The Notice provides that for federal tax purposes, virtual currencies are treated as property and the tax principles applicable to property transactions apply to virtual currency transactions. This means that the fair market value of Bitcoins, as of the date it is received as payment for services, is subject to federal employment taxes and must be included in the recipient's W-2 or 1099 gross income.

Can employers pay employees with something other than US currency?

Employers must comply with the overtime and minimum wage requirements of the Fair Labor Standards Act (FLSA). Although some portion of the minimum-wage requirements can sometimes be met with non-monetary items, such as room and board, monetary payments generally have to be in the form of cash or a negotiable instrument, such as a check. State laws vary, but many, if not most, include a requirement that wages be paid in US currency. For example, the wage and hour laws of Delaware, Illinois, Michigan, New Jersey, Pennsylvania and Texas specifically refer to wages paid "in lawful money of the United States" or with "United States currency."

Can employers pay employees with Bitcoins?

Under the FLSA, Bitcoin payments do not satisfy an employer's minimum wage or overtime obligations. Beyond that, under federal law, the form of compensation is up to the employer and employee. Therefore, employers could meet their minimum wage and overtime requirements with US currency and pay an additional amount beyond that with Bitcoins. State laws vary, some states specify cash or check only, some explicitly defer to the FLSA and some are silent regarding the form of payment.

If employees are exempt from the minimum wage and overtime requirements of the FLSA, can they be paid in Bitcoins?

Under federal law, even most exempt employees have minimum salary requirements. The salary basis test of the FLSA establishes a minimum salary certain exempt employees must receive to maintain that exemption. Like minimum wage and overtime obligations for nonexempt employees, an employer must pay at least that minimum salary in US currency or a negotiable instrument. However, beyond minimum salary requirements, federal law does not prohibit payment in Bitcoins.

Assuming minimum wage/salary and overtime obligations are satisfied, are there other problems with compensating employees in part with Bitcoins?

Yes. For nonexempt employees, that portion of their compensation paid in Bitcoins would be included in the regular rate calculation for overtime purposes, which raises novel questions about when and how to value the Bitcoins. For example, do we assign the Bitcoins the value they had when earned or when the paycheck is cut? Bitcoin valuation has fluctuated dramatically, so the answer has a potentially enormous financial impact. Also, if employees have been misclassified as exempt, valuing any Bitcoin compensation they received will be part of the regular rate and backpay calculation. Other problems include the security of online Bitcoin wallets, problems converting Bitcoins to US currency and volatility in value, all of which can affect an employee's ability to access the full amount of his wages.

Is Bitcoin compensation coming soon?

No. Widespread employee compensation in Bitcoins is unlikely in the near future. Some employers in the US and other countries are paying employees in Bitcoins, but most are Bitcoin-related companies, such as those providing Bitcoin wallets and exchanges. Presently, because the Bitcoin market is volatile and unregulated, the benefit to employees is uncertain. Also, administrative problems for employers are likely to be fairly significant, particularly given that the US Department of Labor has not issued any guidance on the subject to date.