Economics

Getting Paid in Bitcoin

Unfortunately, an automatic crypto purchase made with after-tax earnings won't lower your taxable income.

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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.

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  1. Fuck Joe Biden

    1. And pay his pimp in bitcoin

      1. Home income solution to enable everyone to work online and receive weekly payments to bank acc. Earn over $500 every day and get payouts every week straight to account bank. (rrt35) My last month of income was $30,390 and all I do is work up to 4 hours a day on my computer. Easy work and steady income are great with this job.
        .
        More information. >> https://brilliantfuture01.blogspot.com/

  2. Why in the world does Reason have a series of promotional content for bitcoin exchanges? Are they paying for this “coverage”?

    1. Yeah I wonder why in the hell libertarians might be interested in a new technology that attempts to make private transactions permissionless and distributed.

      1. None of these stories, of course, is about that. They’re all about speculative value and the ease of investing.

        I think it’s more that Reason readers are easily tagged as chumps for get-rich-schemes. This whole thing is such an obvious scam and Ponzi scheme, and Reason readers are just being led to a slaughter by the hedge funds getting into it right now.

        1. "They’re all about speculative value and the ease of investing."

          Sez You.

          "This whole thing is such an obvious scam and Ponzi scheme,"

          For a ponzi scheme this is actually quite long lived.

      2. Transactions between everyone, private or not, require something that holds value over time. That’s why gold was the standard for eons and across civilizations and cultures that developed any type of proto currency.

        It was easily divisible (soft metals don’t require specialized heat tech), stable (it doesn’t evaporate in a day or a week), and it isn’t consumable (like corn and bread). It’s also portable (unlike land, homes, and businesses).

        Bitcoin wins on divisibility and portability and consumption, but it’s stability is of serious question. What these businesses do in paying with “crypto” is essentially no different than a 401k with easier liquidity. The owner of the coin needs to watch the market to put it back in to a stable currency.

        What is wrong with USD is that it is also unstable currently. But $1 didn’t just lose $20k in value. Is that roughly half its value in the same time the USD has lost 7% of its value? There are inflationary and deflationary tolerances that society can handle. 7% is showing to be close to a tipping point. Roughly -33 - 50% change is not a currency.

        1. Bitcoin isn't a currency yet for the simple reason that the US and European governments don't allow it to be used like one. Right now, it functions like an investment and it behaves like one too.

          If Bitcoin could be used as a currency, its usage would greatly increase and its value would fluctuate much less.

          1. What's stopping bitcoin from being used as a currency? That was the entire point of bitcoin, it didn't need international recognition by the financial industry to be used as a currency. It was supposed to be usable as a currency in spite of the status of the US government and/or fiat currency.

            1. That seems to be an insurmountable hurdle unless someone is in the process of figuring out an easy way to spend it. A digital, liquid currency would be great on a lot of levels, but the fact that you have to go through an exchange or exchanges to spend it makes it not real useful.

      3. And if you believe bitcoin's most valuable days are still ahead of 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.

      4. "New"?

        Bitcoin has been around since 2008, it's almost old enough to drive dad to the liquor store.

  3. There are 100 million satoshis in a single bitcoin

    So in a bitcoin transaction, there might be a fraction of a satoshi that gets rounded off...

    1. Isn't that the plot of Superman III?

      1. And Office Space.

        1. I don't think I've ever posted this:

          Michael Bolton, played by...Michael Bolton

    2. You say how many Satoshis you want to transfer and the Bitcoin network executes your transaction. Where do you think anything gets "rounded off"?

      1. WHOOOOOSH

  4. When celebrities start to get paid in something, it's time to get out. (Recall the "pay me in Euro" craze after the 2008 crash.)

    Everyone should have seen the Brady/Damon "fortune favors the bold" TV crypto ads as the top.

    1. FTX is sponsoring MLB umpires. Anyone that is on the side of those blind bastards has their eye on the wrong prize.

    2. Variation on the "Small Investor" principle - "when the small investors are [the buyers] in the market, it's time to get out."

      Supposedly the principle that got Joseph Kennedy out of the market just before the Crash of '29, when he found that the shoeshine boy was in the market.

      Interestingly, I was taught about the Small Investor principle when I took the Series 7 in 1984. 25-odd years later, when I needed it again, I retook the exam, and they no longer teach it.

  5. 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.

    This is how the US government is trying to discourage more and more people adopting Bitcoin for financial transactions: doing so legally is a bookkeeping and taxation nightmare.

    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.

    That's the financial equivalent of bondage and masochism. Whatever turns you on, I suppose. But most other Bitcoin users would like this insanity to end and Bitcoin to function legally just like any other currency. After all, you don't have to pay capital gains taxes when you pay in Euros and the Euro goes up.

  6. Think about it this way: Bitcoin as of this writing is trading at $41,000 per coin.

    I see this article was written between 8-845 am. As of 1108 am it's 29,699.80 per coin.

    Time in the market indeed.

  7. 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.

    And anyone who bought bitcoin "at the time of this writing" is considerably poorer today.

    1. It's also a confusion of DCA and market fluctuations. *Everyone* who bought bitcoin in 2018 is richer because of market fluctuations. The DCA people are, definitively, only better off than roughly half of people who (e.g.) bought on Jan. 5th and sold the following Dec. 14th.

  8. Investors buy Bitcoin because they want out of fiat currencies. Yet fiat currencies have some measurable albeit debatable and in some cases quite small value. I don't understand the factual, historical and sustainable value supporting Bitcoin and the other cryptos. Sure the blockchain has value but again the cost-benefit quantification is likely inflated.

  9. So neither Bitcoin nor the US Dollar have any actual thing of value backing them, just the belief by enough people that they represent "value". Yet Bitcoin has both transaction fees and time delays in transfers, while dollars just get handed over and that's that.
    Tell me again how bitcoin is better?
    (slip the anonymity bit, only the surveillance cameras know where I spend cash. The whole world has access to the blockchain.)

    1. Because it's inherently riskier to hire a hitman with cash

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