Getting Paid, Part II: Crypto

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While crypto has been around for a decade now, its original use cases were largely for payments. However, with the creation of smart contracts on the Ethereum network, we’ve now seen a proliferation of new crypto use cases from NFTs to DAOs. While it was always possible to work as a freelance developer or designer for these projects, DAOs in particular have opened a whole new world of work opportunities. We’re going to talk about how to get started in the Web 3 ecosystem and how to handle receiving payments in crypto. 

What are DAOs?

DAO stands for Decentralized Autonomous Organization. One of the first time DAOs hit the wider media landscape was when Constitution DAO tried to buy one of the original copies of the US Constitution. There are a lot of DAOs out there now, including investment DAOs that formed for the purpose of investing in NFTs or even pro sports teams, and social DAOs which enable people to work together in the furtherance of a shared goal. 

What makes DAOs unique? DAOs are organizations that run on smart contracts, which are self-executing pieces of code. Prior to Ethereum, crypto functionality was largely constrained to “send” and “receive” functions, which served the payment use case well. When Vitalik Buterin created Ethereum, he came up with the concept of a smart contract which enabled developers to add more functionality into their work – i.e. “if X happens, then execute Y code.” This enabled the creation of DAOs. Now, a DAO can upload instructions onto the blockchain so that when certain criteria are met, the code automatically executes a specified set of instructions. 

This means DAOs have no centralized authority running the business. Rather, the participants have governance tokens and use those to vote on the direction of the DAO. All votes are posted to the blockchain where anyone can see them. So a DAO is similar to a corporation in the sense that it’s a group of people working towards a shared goal; however, it differs in that a DAO has no central governing authority and is instead run by its token holders. 

As someone who’s worked closely with Cabin DAO, we’ll use this DAO as an example. Today, more and more of our life takes place online. The internet has made it much easier to find a community of people that share the same passions as you. Cabin DAO’s goal is to bring people together in real life that met on the internet. They have a growing list of properties, including their first just outside of Austin, Texas. These spaces are used for networking retreats so people can work together on projects. The DAO has a community of remote workers that do everything from building out the properties, renting them, hosting events, and much more. The long term goal is to build a decentralized network of properties tied together by a shared culture, economy, and governance structure. You can learn more about the organization here
To get started with Cabin DAO or any entity in the Web 3 ecosystem, you’ll need to set up a wallet like Metamask. If you need help doing this, check out this link. Once you have a wallet, you’re able to start receiving tokens (recall that governance tokens are how DAOs run). To find out what community you want to get involved in, do some research online. A lot of DAOs use Discord to communicate and organize, so when you’re ready to get involved that will likely be a good way to meet the members. If you like what you see, these organizations need workers just like any company does and so you can often find work opportunities to help the DAOs accomplish their goals.

Getting Paid in Crypto

If you start working for a DAO, it’s likely that you’ll receive compensation in crypto. Even if you don’t work for a DAO, payment in crypto is becoming more common. For example, Coinbase was paying their early employees in bitcoin back in 2013! For remote workers that are international, crypto is fairly easy to use and a cheap way to send money across borders, so we’re likely to see this trend continue

So how do you handle taxes if you’re getting paid in crypto? First, let’s talk about the types of payments you might receive. Stablecoins are one form of crypto which typically tries to stay pegged to a currency, like the US Dollar. Some of the larger stable coins are Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). I personally prefer USDC as it’s one of the largest and its holdings are very transparent (Tether has been criticized for not sharing as much information regarding their investments/holdings that back its USD peg). Given their goal of staying pegged to the USD, stablecoins should not be very volatile and you should be able to swap them into $1 at any time. You might also get paid in other tokens, like Ethereum (ETH) or Bitcoin (BTC). These are more volatile as their prices aren’t pegged to anything. However, they’re very liquid (liquidity refers to how easy it is to get a price quote and how often a token trades) and you can easily get a price quote from a crypto exchange. Lastly, if you’re working for a DAO you might receive payment in their governance token, which may not be as liquid and thus harder to find a price estimate. 

Similar to the work you do and receive payment for in dollars, you need to claim any compensation in crypto as income on your taxes. You can still deduct your expenses, the revenue you receive is just crypto instead of dollars. The IRS is increasingly focused on people that are not paying taxes on crypto, as evidenced by the questions they’ve included on the Form 1040 in the last few years. The easiest way to do this is to keep track of your earnings in excel. You can also go to a website like https://etherscan.io to check your wallet’s transaction history and make sure you didn’t miss anything (remember, everything is transparent in crypto because the blockchain is public!).  

The quirk is that you pay taxes in USD, so you’ll have to convert the crypto that you received to USD for tax purposes. If you were paid $1,000 USDC for a project, it’s fairly easy as stablecoins typically equal 1 USD. However, if you were paid in Ethereum or a token that’s more volatile, you’ll have to look up the price at the time you were paid. For more commonly traded and liquid coins, it’s fairly easy to get a price quote. If you were paid 1 ETH for a project, and the ETH was worth $1,400 at the time, you’d report $1,400 of income on your taxes. 

What about more illiquid coins, like a DAO’s governance token, which might be harder to get price quotes for? Some of these tokens have liquidity pools (private exchanges where you can trade the token into another crypto currency) where you can get a recent price quote, it may just be harder to find. It’s likely that these tokens don’t trade as frequently, so you may have to use an exchange rate that is a few days or weeks old. Even with the dated pricing quote, this is likely your best estimate of the coin’s value for an illiquid token. If there is no liquidity pool, the DAO likely had a fundraising round in the past (otherwise, how are they paying for the operations?) that you could use as your price estimate. For example, if the DAO sold 1 million tokens to private investors for $5m in total, each token was valued at $5 in that transaction, which you could use as the price estimate for filing your taxes. It’s your responsibility to report this compensation to the IRS, so try your best to come up with a defensible way to value these tokens. 

Recall from our Ultimate Guide to Crypto Taxes, that there you’ll also pay taxes on any capital gains. Let’s go back to the example where you were paid 1 ETH for your work, which was worth $1,400 at the time. If you sold this right away and had no gain on it, then there would be no capital gain/loss to report. However, if you held the ETH for some time and it went up to $2,000 when you sold, then you’d have to report 2 sources of income: (1) the initial $1,400 worth of compensation your received for your work, which you’d pay income taxes on, and (2) a capital gain of $600 from the price appreciation that occurred when you sold (you sold at $2,000 and your cost basis was $1,400, netting you a capital gain of $600). It can work the other way too, if you received ETH when it was $1,400 and eventually sold it at a lower price, you’d have a capital loss to report on your taxes. 

What happens if the tokens you received end up being worthless? After all, in the recent crypto winter we’ve seen tokens worth billions, like Terra, go under overnight. It’s not inconceivable that the DAO you work for, or any token you receive, may not survive. If you can sell it for a loss on the way down, you’d treat it like we just discussed and recognize the capital loss at the time of the sale. However, what about illiquid tokens where you might not be able to sell? Crypto is still a fairly new asset class, but there might be a way for you to write off the loss. It’d be best to work with an accountant on this to ensure you’re doing everything necessary. This is also a good reason to diversify your work and make sure you’re not going all in on one client/project.

Conclusion

Crypto is still in its early days but as the Web 3 economy grows, it’s becoming an increasingly common source of work and payment. If you view this as an ecosystem to get educated on, it can open up a lot of opportunities. Not only will you get to add Web 3 experience to your resume, but you’ll also meet new people and potentially find valuable employment opportunities.

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