Getting Paid in Bitcoin
Unfortunately, an automatic crypto purchase made with after-tax earnings won't lower your taxable income.
During the last year, several professional athletes and two big-city mayors announced that they would take a portion of their salaries in bitcoin. If you get paid via direct deposit and are bullish on bitcoin, you too can turn your salary into satoshis. (There are 100 million satoshis in a single bitcoin.)
For most of us, getting paid in bitcoin doesn't mean our salary is denominated in bitcoin. Rather, it means your employer directly deposits part of your fiat-denominated paycheck into a bank account connected to a crypto exchange, which then uses the money to purchase bitcoin and deposits that amount into your crypto wallet.
Coinbase, the most widely used cryptocurrency exchange, rolled out this direct deposit function in late September. Users can print the direct deposit paperwork from Coinbase's website and send it to their employers or, if the employer contracts with any one of several large payroll processing companies, set up direct deposit entirely online. They can then choose to have a specific dollar amount from every paycheck, or a percentage, converted to bitcoin or any of several other cryptocurrencies.
The basic process is not novel. Investment companies such as Vanguard and Fidelity allow customers to directly deposit their paychecks into brokerage accounts. Some people have their paychecks divided and direct-deposited across traditional checking and savings accounts, or even accounts at different banks.
The new option might sound like buying crypto yourself, but with extra steps. "In my opinion it's probably just marketing," wrote one member of the r/Bitcoin subreddit in November. "Oh this famous athlete is getting paid in Bitcoin and endorses whatever exchange. His fans might follow and buy bitcoin on that exchange bringing in revenue for that exchange."
There is a lot of truth to that. Cryptocurrency exchanges make their money on transaction fees, and more users means more transactions.
But just like banks, cryptocurrency exchanges compete with each other to get users on their platforms. Coinbase, for instance, charges you a fee to purchase crypto with your bank account but waives that fee if you set up direct deposit. You will still pay fees when you sell, but that's true of bitcoin regardless of what exchange you use or whether you use one at all, because the "miners" who record your transaction to the blockchain don't do so for free.
Why trust a crypto exchange to make your purchase on a schedule when you could time the market yourself? The boring answer comes from investor and author Ken Fisher, who once wrote, "Time in the market beats timing the market—almost always."
Think about it this way: Bitcoin as of this writing is trading at $41,000 per coin. While some people likely have made a lot of money by accurately predicting the bottom of a price dip, everyone who bought bitcoin in 2018—whether they bought at $17,089 on January 5 or $3,183 the following December 14—is richer today, especially if he made regular purchases over the course of that year. This is the beauty of dollar-cost averaging.
That said, getting paid in crypto is not the same as a pretax contribution to a retirement account. Your automatic crypto purchase is made from your after-tax earnings and won't lower your taxable income. Using your bitcoin salary, either to make a purchase or to convert it back into dollars, is a taxable event if your investment has appreciated. But for some folks (including me!), the cost of spending bitcoin—just like the cost of accessing a retirement account early—is a feature, not a bug. "If you make it effortless to save, and a chore to spend, most people are likely to spend less," wrote another poster on the r/Bitcoin subreddit.
And if you believe bitcoin's most valuable days are behind it? Well, I won't try to convince you otherwise. But I will say that it's very easy to dip your toe into crypto without believing it will replace the dollar. And it's getting easier every day.
