Paying contractors and staff in crypto: tax, withholding and records
Crypto pay is still pay. How US and UK rules treat wages and contractor fees settled in tokens, and what the books need to show.
If you pay people in tokens or stablecoins, the tax rules do not get lighter because the currency changed. Each payment needs a fiat value at the moment it is made, the right payroll or information return, and a record of the gain or loss you made by giving the tokens away.
This explainer covers the US and UK positions as published by the tax authorities, plus the book entries that sit behind them. It is general information; worker status and local rules can change the answer.
United States: employees
The IRS position dates from Notice 2014-21 and still stands: the form of payment does not change whether something is wages. Virtual currency paid to an employee is reported on Form W-2 at its fair market value and is subject to federal income tax withholding, FICA and FUTA, just like cash pay [1]. The IRS repeats this in its virtual currency FAQs [2].
In practice that creates a cash problem. Withholding and payroll taxes are remitted in dollars, so the employer has to fund them from cash or by reducing the token amount delivered. Decide which before the first pay run, and document how the dollar value was set.
The value is the fair market value in US dollars when the employee receives the tokens [2]. The FAQs say that for on-chain transfers the value is taken at the date and time the transaction is recorded on the ledger, and for exchange transactions the dollar amount the exchange records can be used [2]. The employee's basis in the tokens equals the value included in income [2].
United States: independent contractors
For contractors, the dollar value of tokens at receipt is self-employment income [1]. The payer has information reporting duties: Notice 2014-21 says crypto payments are reportable to the same extent as payments in other property, and backup withholding rules apply in the same way, so collect a Form W-9 and taxpayer identification number before paying [1].
The notice was written when nonemployee pay went on Form 1099-MISC; it now goes on Form 1099-NEC. The current instructions set the filing threshold at $2,000 of nonemployee compensation for the year, for tax years beginning after 2025, with possible inflation adjustment from 2027 [3]. Payments made in 2025 used the older $600 threshold. Check the threshold against the aggregate dollar value paid to each contractor across the year, crypto and cash combined.
The payer's own disposal
Handing over tokens is also a disposal by the payer. The IRS FAQs treat paying for services with virtual currency as an exchange of a capital asset, with gain or loss equal to the value of the services less your adjusted basis in the tokens [2]. Stablecoin payments usually produce small gains or losses, but they still need to be calculated and tracked by lot.
For US GAAP reporters under ASU 2023-08, the crypto asset is carried at fair value. Its rollforward disclosure lists use as payment for services as a type of disposition, and the cumulative realized gain or loss is measured against cost basis, not the last carrying amount [4].
| Account | Debit | Credit |
|---|---|---|
| Contractor invoice approved Invoice for design work, $5,000 | ||
| Contractor expense | 5,000.00 | |
| Accounts payable | 5,000.00 | |
| Invoice settled with 2 ETH 2 ETH x $2,500 at the on-chain timestamp = $5,000; carrying amount at last remeasurement $4,600 | ||
| Accounts payable | 5,000.00 | |
| Digital assets - ETH | 4,600.00 | |
| Gain on digital assets | 400.00 | |
United Kingdom: employees
HMRC treats exchange tokens paid as earnings as money's worth, so they are liable to Income Tax and National Insurance contributions [5]. The key test is whether the tokens are readily convertible assets. HMRC's view is that exchange tokens such as bitcoin are tradable on exchanges, so trading arrangements exist and they will usually count as readily convertible assets [6].
Where the tokens are readily convertible assets, the employer must operate PAYE and account for Income Tax and NICs using the best estimate of value it can make at the time [6]. GOV.UK guidance adds that the tax is paid through PAYE, often by deducting from other pay in the same period. If the employer does not operate PAYE because the tokens are not readily convertible, the employee reports the income in pounds on a Self Assessment return [7].
Watch the recovery step. For non-cash pay that the employer accounts for through PAYE, the employee is expected to make good the tax. HMRC's manual explains that if an employee does not reimburse the employer within 90 days after the end of the tax year, the unpaid amount becomes a further taxable benefit [8]. Agree how recovery works in the employment contract.
United Kingdom: contractors
Genuinely self-employed contractors account for their own tax on the sterling value they receive. Your exposure is that the worker is really an employee, in which case the PAYE position above applies. The status test is the same whether you pay in pounds or tokens.
| Item | US | UK |
|---|---|---|
| Employee pay in tokens | W-2 wages; income tax withholding, FICA, FUTA [1] | Earnings; PAYE and NICs if readily convertible [6] |
| Valuation point | Dollar value when received [2] | Best estimate of value at the time [6] |
| Contractor pay | Self-employment income; Form 1099-NEC at $2,000+ for 2026 [3] | Contractor self-reports; status test still applies |
| Payer's tokens | Disposal: gain or loss vs basis [2] | Disposal for the business; track gains |
Records to keep
- Each payment's transaction hash, timestamp, token, quantity, sending and receiving addresses.
- The price source and exact price used to set the fiat value, applied consistently.
- The approved invoice or payroll record the payment settles.
- Lot relief for the tokens given away, and the resulting gain or loss.
- Worker status decision, W-9 or equivalent, and any written election to be paid in crypto.
What to do
- Fix a valuation rule (source and timestamp) before the first crypto pay run and apply it to every payment.
- Fund US withholding and payroll taxes, and UK PAYE, in fiat; decide whether to gross up or deduct.
- Total each US contractor's payments across cash and crypto for the 1099-NEC threshold.
- Book the disposal gain or loss on every payment, not only on large ones.
- Have a payroll adviser confirm treatment for each country where workers sit.
Sources
- Internal Revenue Bulletin 2014-16 (Notice 2014-21) (IRS)
- Frequently asked questions on virtual currency transactions (IRS)
- Instructions for Forms 1099-MISC and 1099-NEC (IRS)
- ASU 2023-08 Intangibles - Goodwill and Other - Crypto Assets (Subtopic 350-60) (FASB)
- CRYPTO42050 - Cryptoassets for businesses: Income Tax: paying employees in cryptoassets (HMRC)
- CRYPTO21100 - Cryptoassets for individuals: Income Tax: earnings from employment - readily convertible assets (HMRC)
- Check if you need to pay tax when you receive cryptoassets (GOV.UK)
- EIM11956 - Employee's requirement to make good PAYE (HMRC)
General information for finance teams, current as of publication. Not legal, tax or accounting advice.