Rewarding employees with crypto-assets?
22 March 2021
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.
In December 2019 HM Revenue and Customs published their guidance document on crypto-assets for individuals, covering 'exchange tokens' (exchange tokens are intended to be used as a method of payment and encompasses crypto-assets like Bitcoin) and HMRC make it very clear that profits from buying and selling Bitcoin and any other crypto-assets are subject to tax.
HMRC has 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” e.g. 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 (e.g. 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.
Read David Britton’s recent article in the Daily Mail discussing how to pay tax on cryptocurrency profit.