A company that funds payroll from crypto can face a specific cash-flow squeeze: the price can drop between when wages are calculated and when the dollar-denominated tax deposit is due. This article lays out the IRS’s published rules on the Trust Fund Recovery Penalty (TFRP), then applies them to crypto payroll as my own reasoning. I haven’t seen an enforcement case on this exact scenario, so treat the application as a plausible risk, not a documented outcome.
What “Trust Fund” Means
The IRS defines trust fund taxes as withheld income and employment taxes (including the employee’s share of social security) and collected excise taxes. The business holds this money in trust until it makes the federal tax deposit (IRS: Employment taxes and the TFRP). The IRS says the TFRP equals the unpaid balance of the trust fund tax: the unpaid withheld income tax plus the employee’s share of FICA.
Who Can Be Responsible
Per the IRS, a responsible person is someone with the duty and power to direct the collecting, accounting and paying of these taxes. That can include corporate officers or employees, partners, directors or shareholders, nonprofit board members, and anyone with control over disbursing funds. An employee who only pays bills as a superior directs is not a responsible person. The penalty may be assessed against “any person” who meets both criteria (IRS). The page doesn’t say how it works when several people qualify for the same unpaid amount, so I’m not describing that.
What “Willful” Means
The IRS says the person must have been, or should have been, aware of the unpaid taxes and either intentionally disregarded the law or been plainly indifferent to its requirements, and that evil intent is not required. It also says using available funds to pay other creditors when the business cannot pay employment taxes is an indication of willfulness (IRS).
What the IRS Says About Wages Paid in Crypto
In Notice 2014-21, the IRS says the fair market value of virtual currency paid as wages is subject to federal income tax withholding, FICA tax and FUTA tax, and must be reported on Form W-2. It says the medium of payment generally doesn’t matter for wage treatment and refers readers to Publication 15 for withholding, depositing, reporting and paying employment taxes (IRS Notice 2014-21). The practical consequence is that the tax obligation is measured in dollars even when the pay is in coins.
When the Deposit Is Due
IRS Notice 931 (revised September 2026) says that under the monthly schedule, which applies if your lookback-period liability was $50,000 or less, taxes from payments made in a calendar month are due by the 15th of the following month. Under the semiweekly schedule, which applies if the lookback liability was more than $50,000, paydays on Wednesday, Thursday or Friday are due the following Wednesday, and paydays on Saturday through Tuesday are due the following Friday. Under either schedule, if you accumulate $100,000 or more in liability on any day, the deposit is due by the close of the next business day. It also says you must use electronic funds transfer for all federal tax deposits, and that you can authorize a payroll service or other third party to make deposits for you (IRS Notice 931). Because the gap between payday and deposit can be days or weeks, it is exactly the window where a coin’s price can move.
How a Price Drop Creates a Shortfall (Assumed Numbers)
These figures are assumed. Say a company pays wages in crypto and withholds $1,500 of employee taxes for the period, leaving that amount in coins. If the coins fall 30% before the deposit date, the $1,500 is worth $1,050, a shortfall of $450 in dollars that the company must make up from other funds. To cover the same $1,500 after a 30% decline, the company would need to have held about $2,143 worth of coins at the start ($1,500 ÷ 0.70). The simplest fix is the one I suggest below: hold the withheld amount in dollars.
| Assumed withheld taxes | Value |
|---|---|
| At withholding | $1,500 |
| After a 30% price drop | $1,050 |
| Shortfall | $450 |
How This Could Apply to Crypto Payroll (My Reasoning)
In my view, a business holding withheld amounts in crypto could find that a price drop leaves it short of the dollar deposit. If it then pays other bills instead of the deposit, the IRS statement above about paying other creditors is the part I’d worry about. That is my application of the IRS’s description, not a ruling on crypto.
If the IRS Proposes the Penalty
The IRS says it sends a letter stating its plan to assess the TFRP. You have 60 days from the letter date (75 days if addressed outside the U.S.) to appeal. If you don’t respond, the penalty is assessed and a Notice and Demand for Payment is sent. The IRS points to Publication 5 for the appeal process (IRS).
Ideas to Reduce the Risk (My Suggestions)
- Convert withheld tax amounts to dollars when you withhold them. My reasoning is that this removes the window where a price drop could create a shortfall.
- Treat the tax deposit as the first obligation paid from available cash. In my view, a written policy that you actually follow is better than an informal intention.
- Know who has signature authority and cash-flow decisions. The IRS test turns on duty and power, so I’d make that explicit and make sure each person understands the stakes.
- Consider a payroll provider that handles tax deposits. I haven’t evaluated any provider, so I’m not naming one.
- Keep a dollar reserve for tax deposits sized for a large price drop, in my view, not just ordinary fluctuations.
- If a shortfall has already happened, read the IRS page above and the appeal timeline, because the 60-day clock starts with the letter date.
Crypto payroll also creates a second dollar-measured obligation: the wages themselves are reportable at fair market value, as Notice 2014-21 says above. For a parallel example of crypto being measured in dollars at the moment it changes hands, see how a crypto card purchase becomes a taxable event, and for another payroll-adjacent rule, why crypto tips do not qualify for the no-tax-on-tips deduction.
Questions About the Trust Fund Recovery Penalty and Crypto Payroll
Does this apply only to businesses paying wages in crypto? No. The IRS page describes trust fund taxes generally. The crypto angle is my reasoning about price risk on top of it.
Does the employer’s share of FICA carry the same penalty? The IRS page defines trust fund taxes as withheld income tax and the employee’s share. It doesn’t list the employer’s share as a trust fund tax.
Can the penalty be appealed? The IRS says you have 60 days from the date of the letter (75 if addressed outside the U.S.), as described above.
My Take on Trust Fund Recovery Penalty
- In my view, the reassuring part is how fixable this is: converting withheld amounts to dollars on payday removes the price risk entirely, and a payroll provider can handle the deposit schedule.
- In my suggestion, put the deposit dates from your schedule on a shared calendar so more than one person sees them coming.
The Bottom Line
In my view, if you control a company’s payments, the practical takeaway is to keep withheld taxes in dollars and pay the deposit first. The IRS’s description of willfulness is the standard to measure yourself against.
Sources
- IRS: Employment taxes and the Trust Fund Recovery Penalty (TFRP)
- IRS: Notice 2014-21
- IRS: Notice 931, Deposit Requirements for Employment Taxes
This article offers general information and my own opinions, not financial, tax, or legal advice. Laws, tax rules, and products change and can differ by location, so check current official sources and talk to a qualified professional about your own situation.