Are you working in crypto? Then you’ve probably been paid in crypto or received token grants at some point in your career. You’ve likely struggled to tell what taxes and forms you need to file. Your company might not even give you the guidance you need.
This uncertainty can cause a lot of anxiety, especially in countries where tax regimes are complex and opaque.
Crypto Compensation for Employees
Many of the top crypto companies in the world pay their employees with fiat and tokens in the form of token grants. but many employees may not realize the lengths that these companies go to, to ensure you are paid your tokens compliantly and on-time.
However, many crypto companies still go ahead and pay their employees with their native cryptocurrencies. Often, companies may not have structured their token compensation plans optimally for their employees.
This article will provide you with a high-level overview of the very first questions you need to know as someone who is receiving crypto as part of their compensation.
Frequently Asked Questions
Why am I receiving token grants for my compensation? What are token grants?
In the tech world, it’s extremely common for employees to get paid in equity to incentivize and align objectives with the company’s success.
Crypto takes after this approach, and gives employees ‘equity’ through the underlying token of their blockchain project or platform.
Token grants are great for employees because it can give you the opportunity to invest in the token at much lower valuations than what it would likely become after a number of years. Moreover, taxation on your token grants can be much cheaper than if it was distributed as normal under many scenarios.
On the other hand, token grants are subject to complexities like vesting and different tax treatments which have to be handled carefully to ensure it benefits you as the recipient.
In summary, many project teams choose to pay their early joiners and key employees in token grants to ensure the team is always focused on the success of the project. Compensation through token grants ensure that key team members enjoy a much higher potential upside when the company succeeds.
How can I tell if I am receiving crypto salary or token grants?
Usually, crypto salaries would be included as part of your employment agreement. Moreover, crypto salaries would normally be taxed as part of your monthly salary (i.e. employment tax), although the tax treatment of crypto may differ per country.
A token grant, on the other hand, requires you to sign a separate token grant agreement. This agreement will include details on the amount of tokens that may vest, when they will vest and how they will vest, among other details. Additionally, the tax treatment of tokens received through such an agreement may differ vastly from tokens received as salary.
How can I tell what taxes I need to file and pay? How do I know what taxes I have to pay in which countries?
The answer to this question depends on your employment situation, your token grant structure and tax residency status.
For example, a United States citizen that works as a contractor based in Italy for a company based in Switzerland receiving token grants is a very complicated tax situation. On the other hand, a United States citizen working as a full-time employee for a US-based company receiving token grants can be much more straightforward in tax treatment.
There is guidance online available on the topic like Toku’s guide to understanding how the US taxes token grants, but as each person’s circumstances are unique, we strongly encourage you to look for tax accountants specializing in cryptocurrency taxation.
At Toku, we work with the foremost experts in cryptocurrency taxation, international mobility, and local payroll laws to provide organizations with perfect tax calculations and comprehensive guidance. Crypto companies don’t have to compromise when they rely on truly crypto-native solutions like Toku.
When do I get taxed?
You generally only incur taxes when ‘taxable events’ occur. If you are a recipient of a token grant agreement, taxable events will occur when (1) your tokens vest and settle, (2) you exercise your token options, or (3) when you sell your tokens.
When your token vests and settle
For token grant agreements like Restricted Token Units (RTU), you are taxed when restricted tokens vest and the transfer is fully-settled. Note that vesting conditions can be unique to each token grant agreement, as covered in our article on how token vesting schedules work.
Generally, when restricted tokens vest and settle, it triggers income taxes based on the token's fair market value (FMV) on the date of settlement (there are exceptions to this, such as when an 83(b) election is already filed).
When you exercise token options
With token options, you gain the right to buy tokens at a set price (the "strike price"), but you won’t trigger a taxable event until you exercise that option and buy the tokens at the set price.
For token options, Income tax applies to the difference between the strike price and FMV at the exercise time.
When you sell your tokens
When selling tokens, you will owe capital gains tax based on the difference between the selling price and the fair market value of the tokens when you first received them.
If my tokens vest multiple times a year, what token price will my taxes be based on if it is publicly-traded and volatile?
Unlike private stocks, most tokens are tradeable on the open market, meaning price information is always available. However, although tokens are transparent in terms of pricing, its price can move 10% up or down at a moment’s notice.
For this reason, most countries will take the ‘fair market value’ of tokens, instead of the price of the token on any specific day.
The fair market value of tokens is often determined through the spot price at the time of transfer across a broad number of exchanges. Sometimes the weighted average price over a period may be used as well to mitigate any short-term price swings.
Alternatively, private valuations of the token may be used as the fair market value depending on the liquidity of the token.
If the tokens are not yet traded on the open market and do not have a market value, do I have to pay any taxes?
Even if the tokens you receive are not traded yet, they still have a value which will be taxed by the relevant tax authority.
But what is the value of a token that is not traded yet? Usually, your token grant agreement will contain a valuation of the token at the time of the grant which can be used in tax calculations. However, as time passes the value of the token may change even if it is not trading. In these cases, your company may ask an independent third-party to provide a valuation of the tokens at a specific time.
This is similar to how private company stocks are valued for 409A purposes. The methods of illiquid token valuation are not yet precisely defined or codified, such as for 409A purposes, given how new token compensation is. Thus, token valuation needs to be redone more frequently than for private company stocky regardless of liquidity
Read more on how token valuations work in the United States.
How can I make sure I am optimizing my taxes?
Due to the uniqueness of any one person’s situation, optimizing taxes for an individual would often require the help of an accountant; however, we will recommend you to take a look at two commonly-used mechanisms
- The 83(b) election can be used to significantly reduce your tax bill. In some situations, failing to file for an 83(b) election can mean you will pay more than double the amount of taxes.
- Don’t double pay your taxes! When you sell your unrestricted tokens for cash, be mindful of the ‘true cost basis’ of your tokens when reporting capital gains.
International taxation and taxation of cryptocurrencies are two fields of study that, when mixed together, become a very complicated issue to deal with.
This FAQ only skims the surface of the true depth of the complexities that we solve daily for the leading organizations in the space, as Toku recognizes the importance and complexity of managing token grants and agreements.
Toku shines by automating and simplifying data intake, processing and tracking, while auditing each result manually. Our dedicated token grant administration specialists take on the responsibility of reviewing and inputting all grant-related data, ensuring accuracy and compliance.
Make your Token Grant income simple with Toku.