Rewarding employees with crypto-assets?
28 January 2019
With the use of crypto-currencies growing quickly, it is important to understand how they will be treated if they are used to reward employees.
HMRC has recently issued a swathe of updated guidance on the tax treatment of crypto-currencies or rather crypto-assets, as HMRC would prefer to call them. The reason for calling them crypto-assets is that HMRC does not tax them in the same way as normal foreign currencies - mainly because they do not have all the same characteristics and have many more restrictions and conditions.
Established ‘cryptocurrencies’ like bitcoin are used as a method of payment and HMRC describes them as ‘exchange tokens’ with a token’s value “based on its use as a means of exchange or investment”. In contrast, where an organisation issues assets that “provide the holder with access to particular goods or services on a platform” these are described as utility tokens. Companies have also started issuing crypto-assets that give the holder a “particular interest in a business” eg a profit share or interest in a debt due by the business - termed ‘security tokens’.
Readily convertible assets
When assets that are not cash are given to employees, the employer must operate the usual PAYE and NIC deductions on the value transferred to the employees if the assets can be ‘readily’ converted into money or money’s worth. Crypto-assets that are exchange tokens are likely to fall into this category even if, for new coin offerings, it may be difficult to establish their value.
Similarly, security tokens may be treated as readily convertible if “trading arrangements are in existence, or are likely to come into existence in accordance with any understanding existing when the asset is provided”. This might occur where the company decides to create a market for the asset (to enable employees to cash them in) or it is clear that the right will be realisable in the near future (eg on expected repayment of a debt). Of course, it should be remembered that (in a similar way to issuing growth shares) the tax liability on the initial transfer of security tokens may be small compared to the starting value, which will be relatively low until the business grows.
Utility tokens are less likely to be regarded as readily convertible as they are unlikely to be tradeable. However, employers should remember that tokens that entitle employees to specific goods or services are likely to give rise to a taxable benefit in kind that will need to be payrolled or reported on a P11D.
For help and advice on all types of employee share scheme or incentive, please contact Andy Goodman.
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