History of Fiat, Equity & Token-Based Compensation

The rise of equity-based compensation since the 1950s developed the many different, sophisticated methods of incentivising people with non-cash assets while minimizing taxes. Token-based compensation seeks to achieve the same goals of incentivising employees while minimizing taxes.

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Token Equity vs. Stock: Differences in Functionality & Taxation:

For this reason, you will find that the structures and terminology for providing tokens to employees are similar to traditional equity-based compensation. However, tokens function and are taxed in ways that are different from stock, which this primer covers. 

Regardless of the technological possibilities, tokens are another form of non-cash asset that are taxed as intangible personal property, similarly to non-qualified stock based compensation. And like stock grants, the legal plans and contracts granting tokens have similar options for designing and implementing the compensation plan and agreements.This nuance and complication compounds on a global scale when considering that every country’s laws and approach to crypto is unique. 

For example, we often see organizations make mistakes by not withholding taxes correctly alongside fiat payroll when paying payroll in tokens or vesting token grants. When organizations do withhold taxes correctly, organizations often do not communicate to employees what the tax consequences related to token payroll and grants will be, which causes unnecessary friction with employees.

Challenges and Mistakes in Equity Token Offering Plans

As of August 2023, there is still not a clear answer to the question, “Is a token a security?” in most places. This has unfortunately led to many people in the industry to put together token compensation plans that lack the regulated, structured precedents that many startups follow when issuing equity compensation plans. We strongly suggest that organizations work with qualified administrators, consultants and law firms to understand the structures, taxes and regulations related to token grants. 

Due to the lack of precedents in the crypto industry, we have come across many token compensation plans that create eproblems such as:

• Violating local labor laws by not considering the fringe benefits, bonuses or gratuities rules related to token compensation;
• Errors in the administration of token grants, such as incorrectly setting up and using multi-signature wallets, and errors with “unlocking” tokens granted under restricted token agreements post-genesis;

• Not withholding the right amount of taxes on the tokens, leading to both the company and recipients being penalized, and potentially held criminally liable for tax evasion.

How to Remain Compliant in Token Compensation

Interest in token incentive plans and grant agreements for employees and contractors has grown along with the increasing regulatory and compliance maturity of the crypto industry overall. While significant progress has been made in raising awareness and acceptance of token grant agreements among founders, executives, and workers, there remains a critical knowledge gap when it comes to the structure, communication and implementation of token grants. 

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Toku’s goal is to provide clarity for the industry and peace of mind for its customers to be able to legally and compliantly provide token compensation to their employees.

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