83(b) Elections and Token Grants: The Hidden Risk of Omnibus Wallets for U.S. Grant Recipients

In the fast-evolving world of digital assets, companies are increasingly using token grants to attract and retain talent. For many startups, these grants are structured to mirror equity-based compensation plans, complete with vesting schedules and 83(b) elections. While this approach is innovative, there is an often-overlooked technical risk that could undermine the tax position of both the company and the recipient: the use of an omnibus wallet to hold token grants.

As tax practitioners, we see this as a growing area of scrutiny — one that may pose significant audit risk.

The Importance of 83(b) Elections

Under U.S. tax law, an 83(b) election allows recipients of restricted property such as unvested tokens to elect to include the fair market value of that property in income at the time of grant rather than at vesting. This can be highly tax-efficient because any future appreciation is generally taxed as capital gain, not ordinary income.

But the IRS applies a key test: there must be a “transfer of property” to the service provider for Section 83 to apply at all. Without a demonstrable transfer, the election could be challenged and ultimately disregarded by the IRS.

The Audit Risk: Omnibus Wallet Structures

Many token-based compensation programs rely on omnibus wallets — shared wallets controlled by the issuer or administrator where all unvested tokens are stored. While operationally convenient, this raises a material issue for U.S. grant recipients:

• If the tokens never leave the company’s control, is there truly a transfer of property?

In an audit, the IRS could argue that no property interest passed to the employee at grant, because:

No On-Chain Transfer: The tokens remain in a wallet owned or controlled by the issuer, without a unique blockchain record showing allocation to the employee.

No Enforceable Right: Without a distinct wallet address allocation, the employee may lack a legally enforceable claim to the tokens before vesting.

Substance-over-Form Risk: Even if the company’s records show a grant, the IRS could treat the arrangement as a mere promise to deliver tokens in the future: a classic unfunded, unsecured compensation obligation.

This interpretation would invalidate the 83(b) election. The result? The employee could face ordinary income tax on the tokens’ fair market value at each vesting date, potentially at much higher valuations, and the company’s withholding and reporting obligations could be triggered much later than expected.

Best Practices for Mitigating Risk

To strengthen the defensibility of token-based 83(b) elections, companies should consider:

Documented On-Chain Transfers Use distinct, employee-specific wallet addresses for allocation to demonstrate a transfer of property at grant.

Robust Grant Agreements Ensure legal agreements clearly state that tokens are transferred (subject to forfeiture) at the time of grant, and that the company is acting as custodian, not owner, of the tokens.

Contemporaneous Valuation and Evidence Maintain detailed valuation reports and transaction records to substantiate fair market value and timing of transfer.

Tax and Legal Review Engage tax counsel to review plan design and ensure compliance with Section 83 and other applicable rules such as Section 409A.

The Bottom Line

Omnibus wallets are efficient for treasury management but they can create significant audit exposure if used for token grants intended to support 83(b) elections. The IRS is increasingly sophisticated in its understanding of digital assets and will look beyond form to substance.

Companies issuing token grants should work closely with their tax, legal, and blockchain operations teams to ensure that transfers are real, traceable, and defensible. The cost of getting it wrong for both the employee and the company can be substantial.

Talk to Toku to talk through your token compensation plans and TGE implementation strategy.