How cryptocurrency payments to employees are taxed
With rising acceptance of cryptocurrencies in the UK, businesses are increasingly using them for transactions such as incentives to employees. This post, will discuss how cryptocurrency payments to employees are taxed.
Overview
HMRC considers cryptocurrencies to be "cryptoassets" rather than conventional currencies. Therefore this distinction influences how they are taxed and regulated.
To understand how cryptocurrency payments to employees are taxed, we first need to define what HMRC considers to be earnings. Put simply, if employees receive a gratuity or profit from their employment it is considered earnings if it is money's worth.
Something is considered money's worth where:
Therefore if we apply these principles, cryptocurrency payments to employees are taxed on their 'money's worth'.
An employee could chose to have their salary entirely in cryptocurrency. So they would be taxed on the 'money's worth' value upon receipt. Therefore any increase in value when converted to fiat currency would be subject to capital gains tax. This is capped at 20%, whereas income tax has a rate of up to 45%.
Calculating the value for cryptocurrency payments
Exchange tokens
Where your employee is paid with exchange-listed tokens the process is straight-forward. So the calculated value is based on the exchange value (e.g. CoinGecko) when payment is made.
Utility tokens
The situation is less clear when it comes to utility tokens, because they may only be used as a form of currency on a specific platform. Case law offers little guidance here. One case argued that an employee benefit cannot be taxed if it cannot be exchanged for monetary value. Alternatively, another tax case argued that an amount should be taxable on an employee.
However, realistically employees are unlikely to accept payment in a utility token unless it has monetary value.
PAYE implications of cryptocurrency payments to employees
Where an employee is paid in readily convertible assets ('RCA's'), it is taxed like salary. Meaning, PAYE applies on receipt.
Therefore if you pay employees in cryptocurrency, establish if these are RCA's to ensure PAYE is correctly accounted for to HMRC.
Certain assets like shares and securities are always considered RCA's even if not freely saleable. Although cryptocurrencies are regarded as assets they do not fall into this category. Assets with existing or likely trading arrangements are considered RCA's
These principles were determined in the NMB Holdings Ltd and Aberdeen Asset Management Plc tax cases.
If your employees receive exchange listed cryptocurrency it will probably be considered RCA's because it can be converted into fiat currency. This opinion aligns with HMRC 's internal guidance.
However if employees receive non-exchange listed cryptocurrency or utility tokens, they are not regarded as RCA's.
In this case your employee must account for the cryptocurrency value on their Self-Assessment tax return and pay the relevant income tax liability As their employer you must account for Class 1A National Insurance on the value similar to other benefits in kind (for example private medical insurance).
Crypto token incentive schemes
You might offer your employees cryptocurrency as a bonus alongside other conventional incentives such as EMI share options. Whilst this arrangement won't secure the tax advantages of favoured share schemes, it might be caught by the employment related securities rules. This would potentially apply where crypto security tokens are issued to employees.
Voluntary application of earnings to acquire cryptocurrency
If an employee decides to use a bonus to acquire cryptocurrency they will still be taxed on the full bonus amount even if redirected for a cryptocurrency purchase.
Crypto issued to employees for NIL or discounted price
If you or your employees receive cryptocurrency for less than it's market value there will be an income tax liability based on the discount.
Moreover where cryptocurrency is issued to an employee for NIL consideration the full market value is subject to income tax.
Example
Tony works for TIVA Finance a DeFi platform. His employers issue him 20,000 TIVA tokens. He pays £1,000 for these tokens. The tokens are priced at £0.155p each on TradeGecko.com.
Tony is taxed on earnings of £2,100 being the market value of TIVA tokens of £3,100 less the price paid of £1,000.
Founder crypto tokens
If you receive founder tokens you may be subject to income tax on their value if you haven't paid the full market value. However if issued at negligible value or you paid full value for them, any subsequent increase is subject to capital gains tax.
Sale of cryptocurrency awarded to your employee?
Generally employees pay income tax on the value of the cryptocurrency when awarded less any amounts paid. Any subsequent increase in value is taxed as a capital gain.
Summary
By understanding these principles, businesses and employees can navigate the complexities of cryptocurrency payments to employees and ensure compliance with HMRC.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here