Giving digital assets to employees: the tax implications to be aware of

Token based incentives for employees are becoming increasingly common amongst companies which operate in the digital assets industry. Cryptocurrency exchange platforms, payment providers, game developers, and other companies in the digital asset space offer native tokens or established tokens as a reward for services or as a tool to recruit, retain and motivate staff. Token based incentives can compliment the other incentives offered by the employer, for example equity incentives such as EMI options, CSOP options, growth shares or Restricted Stock Units (“RSUs”).

How do restricted token awards to employees work?

Companies make an award of tokens, subject to a vesting period and/or unlocking schedule. Tokens usually cannot be staked prior to vesting. Tokens vest if the employee remains in employment on the vesting date / allocation date. No vesting usually happens after termination of employment and unvested tokens will usually be lost if employment is terminated prior to vesting.

Performance criteria can be attached to the award. After the tokens vest, they can be sold freely (subject to the limitations of the market on which the tokens are listed, if applicable).

The vesting of tokens can be accelerated in the event of a corporate event, such as a company sale.

There can be a gap between when the tokens are allocated and when they are distributed to the employee.

Tokens are usually held in escrow until they vest and/or unlock.

The employee must have an appropriate digital wallet to receive the tokens and failure to provide an appropriate digital wallet may mean that the tokens may become irretrievable.

Cryptocurrency and token based incentives can take a number of forms, for example:

  • Restricted token units
  • Restricted token awards
  • Token bonus plan
  • Token incentive plans
  • Phantom plans / cash plans which pay out in cash linked to the value of the underlying token on the vesting date

Taxation of cryptocurrency and token based incentives for employees in the UK is very complex for both the employees, the company and the issuer of the tokens. If the token issuer (for example, a foundation) is based overseas, this can increase the complexity of tax treatment.

HMRC guidance on awarding digital assets to employees is light touch and only deals with the most basic of situations. Even though token incentives often behave like share based incentives, it is grey whether token based awards are “securities” within the meaning of employment-related securities legislation. HMRC is updating its guidance periodically and it is therefore strongly recommended that professional guidance is obtained by any employer wishing to award crypto assets or tokens to employees.

In our view, a payrolling obligation may arise when the employee becomes beneficially entitled to the token, depending on the terms of the token award. Employer NIC at 15% (since 6 April 2026) may also apply to the token awards, again depending on the terms of the token awards.

Tax exposures for companies and employees on cryptocurrency and token based incentives can be high as the value of tokens can drop rapidly after grant / vest due to high price fluctuations which can mean that the tax liabilities can arise on assets which have since depreciated in value meaning that the tax liabilities could be higher than the value of the asset.

Allocations of tokens can be pensionable benefits in some circumstances.

Companies awarding tokens or cryptocurrency to employees should think about:

  • Tax point – the employer should seek advice regarding the timing of the tax charge related to token award, considering its terms and whether the awards are subject to a vesting or unlocking schedule.
  • Payroll withholding – should the employer operate payroll on the transfer of tokens or other digital assets to UK employees? If the tokens are not listed on a regulated exchange, are they otherwise readily sellable? Is there a P11D obligation in relation to tokens?
  • Tax elections - Should section 431 elections be entered into when transferring tokens and other digital assets to UK employees?
  • Net settling token awards – can the tax arising on the token awards be dealt with by withholding sufficient tokens or can it be settled using cash?

Expert advice on cryptocurrency and token incentives

BDO advises companies looking to incentivise its employees with tokens and digital assets. If you have any questions about token based incentives, or any other digital asset incentives for your business, you can contact Veronika Lipinska or Matthew Emms, who will be happy to help you.