Tax planning with crypto assets as employee incentives
When you make crypto payments to your employees this results in potential tax issues. In this post, we consider methods of tax planning with crypto assets which could avoid these problem areas.
Overview
Businesses in the blockchain or crypto asset space are increasingly providing crypto assets to their employees as incentives. This is an alternative to share and option plans which are more traditional employee incentives
Although crypto is a new class of asset, HMRC have aligned the tax treatment with company shares. For example, the identification of particular crypto assets by using the pooling method.
Therefore a business could use tax planning with crypto assets in the same way that other businesses use employee share schemes.
Practical issues
This form of employee incentive raises complex questions about the legal, regulatory, and tax consequences of employees holding crypto assets. This is compounded when a company’s workforce is expanding globally.
Many overseas territories are still grappling with the tax treatment of cryptocurrencies and other crypto assets. What's more, the approach differs from country to country. Even in the UK, there is still no specific tax legislation aimed at crypto assets.
HMRC state in their guidance that where crypto assets are provided to employees as incentives they could be taxed as Readily Convertible Assets (RCA's). Furthermore, this tax treatment mirrors that of company shares provided to employees which are RCA's.
Establishing the correct valuation for any crypto asset award is key where these are regarded as RCA's. This is because the business needs to correctly account for any Tax and NI liabilities on these awards via the PAYE system.
When crypto asset incentive awards aren't RCAs, the income tax liability is accounted for by the employee via their Self-Assessment tax returns.
As the market value of crypto can be extremely volatile it is important to consider the timing of any crypto asset award. Failure to do so, will undermine its effectiveness as an employee incentive. Potential solutions to the issue of volatile crypto values are discussed below.
Tax planning with crypto assets as employee incentives
Linking crypto asset awards to future growth
Crypto awards could be structured In much the same way that growth shares are. These type of shares are used to reward employees for a company's future growth above a predetermined threshold. Indeed, if structured correctly, your employees would suffer little or no income tax liability on a crypto asset award scheme set up in the same way. Notably, the value of the crypto tokens would be linked to any future growth of your business,
Phantom crypto awards
An alternative strategy is to grant phantom crypto incentive awards to your employees. This would be similar to an employee phantom share award. A phantom crypto award would ne linked to the future value of an your company's crypto token. On the positive side, this would be without physical granting tokens to your employees.
This form of award would avoid any valuation issues outlined above. However, any future returns on crystallisation of the phantom award would be taxed as employment income and would attract employer and employee NICs liabilities.
Summary
As mentioned previously the UK has not introduced a specific regime for taxing crypto. Instead, HMRC chooses to apply existing tax rules for shares to this new asset class. This potentially could be used to your advantage, though we would recommend obtaining HMRC clearance, prior to implementation of any award scheme.
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