Inland Revenue has recently released rules for how employers can comply with their tax law obligations when paying their employees in cryptocurrencies.
However, employers need to be cautious before jumping on the cryptocurrency band-wagon. While Inland Revenue (IR) has outlined how it can claim its tax dollars on crypto-remuneration, questions remain about how this approach sits with current employment laws which require wages and salaries to be paid in money only.
Cryptocurrencies burst onto the scene in 2013 following the rise of bitcoin, the most well-known and trusted cryptocurrency. Bitcoin emerged in 2009 but gained significant attention after its value increased 10-fold over a 2-month period.
The value (and use) of bitcoin and cryptocurrencies in general has continued to rise significantly; at the time of writing this, a single bitcoin will fetch you $16,300.
Cryptocurrencies are untraceable, decentralised, digital currencies that are created by, and managed through, advanced encryption techniques that allow them to be traded instantaneously, without government regulation or interference. However they are still incredibly volatile; on Wednesday last week Bitcoin's price dropped more than $600 in 30 minutes.
While other countries have been wary of cryptocurrencies, or slow in trying to incorporate the otherwise regulation-free currency into their regulatory framework, New Zealand has taken its first step in recognising the reality that cryptocurrencies are an important medium of exchange in the digital age.
Although IR has indicated that companies can, and should, pay tax on cryptocurrencies that are used in payment of salaries or wages under the pay as you earn (PAYE) tax regime, the framework is strict. The ruling from IR, which came into effect on September 1, provides certain parameters for when and how a cryptocurrency can be used as payment of salary or wages in a tax context.
First, the payment arrangement must be expressly provided for in an employment agreement, and payments must be in regular, fixed amounts. Second, whichever cryptocurrency is used, it needs to be directly convertible into a standard form of payment; and must be pegged to at least one fiat currency – meaning it must be tied to a standard currency, such as the New Zealand dollar.
Cryptocurrencies also cannot be subject to a "lock-up" period, which prevents them being transacted or traded for a specific period of time.
In the ruling, the IR commissioner takes the view that cryptocurrencies are not "money" as commonly understood, because they are not issued by any government and are not legal tender anywhere.
Notwithstanding that, the ruling states that there is nothing in the Income Tax Act that limits the definition of salary and wages to monetary payments; and therefore, at least from a tax perspective, the meanings of salary and wages are capable of including payment in cryptocurrencies.
Despite some of the recent media coverage on the ruling by IR, it may be jumping the gun for employers to assume that it is now legal to pay their employees in cryptocurrencies.
Importantly the IR ruling does not address the impact of the Wages Protection Act, section 7 of which specifically states that all wages must be paid "in money only". The act further defines money as any "New Zealand coin or New Zealand banknotes, or combination of both" of which is "legal tender".
Despite IR's ruling it is unlikely that Kiwi employers will suddenly flock to pay their employees in cryptocurrencies, as this may be perceived as complex or as creating uncertainty given fluctuating values.
If, as many people predict, cryptocurrencies become more integrated into our increasingly digital society, other legislative changes are going to be needed to ensure that our laws keep up with the rapid pace of change in this field.
In the meantime though, employees may take some comfort in knowing that they can not be paid in cryptocurrencies unless they expressly consent.
Susan Hornsby-Geluk is a partner at Dundas Street Employment Lawyers.