How cryptocurrency payments to employees are taxed
Since our original post, there has been continued and rising acceptance of cryptocurrencies in the UK. As a result, cryptocurrency is increasingly being embraced by businesses for multiple transactions - this also includes being used as a form of incentive to employees. In this post, we're going to discuss how cryptocurrency payments to employees are taxed.
Overview
Because HMRC considers Cryptocurrencies such as Bitcoin and Ethereum to be "cryptoassets" rather than conventional currencies, this influences how cryptocurrency is taxed and regulated.
When considering how cryptocurrency payments to employees are taxed, you first need to consider what is considered earnings by HMRC. Put very simply, the legislation stipulates that even where employees receive a gratuity or profit from their employment that does not take the form of money, they will be considered earnings if they are money's worth.
Something is considered money's worth where:
Therefore if we apply these principles, cryptocurrency payments to employees are taxed on their 'money's worth'.
On this basis, an employee could chose to have their salary paid entirely in cryptocurrency. In essence they would be taxed on the 'money's worth' value of it on receipt. So any increase in value when converted to fiat currency would be subject to capital gains tax (which is currently capped at 20% for crypto), as opposed to income tax (at 45%).
Calculating the value for cryptocurrency payments
Exchange tokens
Where your employee is paid in the form of an exchange-listed token the position is relatively straight-forward. Any value would be calculated by reference to the value listed on the exchange (e.g. CoinGecko) at the time the payment is made..
Utility tokens
The position is less clear when it comes to utility tokens, as they may only be used as a form of currency on a specific platform. Unfortunately case law isn't very helpful in this respect. One case argued that an employee benefit cannot be taxed where it cannot be exchanged for monetary value. Conversely this tax case contests that an amount should be taxable on an employee.
However, if we adopt a pragmatic approach, it's unlikely that any employee would choose to be paid in a utility token unless it had some form of monetary value.
PAYE implications of cryptocurrency payments to employees
Where an employee is paid in the form of readily convertible assets ('RCA's'), it is taxed in much the same way as salary. In other words, it is subject to PAYE on receipt.
Therefore if you make cryptocurrency payments to your employees it is important to establish whether these are RCA's so that PAYE is correctly accounted for to HMRC.
Certain classes of assets for example shares and securities will always be considered RCA's even where they are not freely saleable. Although whilst cryptocurrencies are regarded as assets they do not fall into this category.
Assets for which trading arrangements exist or are likely to come into existence will be considered RCA's. These principles were determined in the NMB Holdings Ltd and Aberdeen Asset Management Plc tax cases.
If you pay your employees cryptocurrency which is listed on an exchange they will most likely be considered RCA's because they can potentially be converted into fiat currency and thus valued. This opinion is set out in HMRC 's internal guidance.
However if your employees receive cryptocurrency that cannot be traded on an exchange because they haven't been listed or they can only be used as a utility token, they will not be regarded as RCA's.
If this applies, your employee will need to account for the value of the cryptocurrency on their Self-Assessment tax return and pay the relevant income tax liability You as their employer will also need to account for Class 1A National Insurance on the value in much the same way as other benefits in kind (for example private medical insurance).
Crypto token incentive schemes
You might want to offer your employees cryptocurrency as a bonus alongside other conventional incentives such as EMI share options. Whilst this arrangement will not secure the tax advantages of such favoured share schemes, equally they may not be caught by the employment related securities rules. This would potentially be the case where crypto security tokens are issued to employees.
Voluntary application of earnings to acquire cryptocurrency
If an employee decides to surrender a bonus in part or full for cryptocurrency (or your company's own token) they will nevertheless still be taxed in full on any bonus which has been redirected for a cryptocurrency purchase.
Cryptocurrency issued to employees for NIL or discounted price
If you (as director) or your employees receive cryptocurrency for less than their market value there will be an income tax liability based on the amount discounted.
Where cryptocurrency is issued to an employee for NIL consideration the full market value of the cryptocurrency will be subject to income tax.
Example
Tony is employed by TIVA Finance a DeFi platform. His employers issue him with 20,000 of their native TIVA tokens. He is asked to pay £1,000 for these tokens. The tokens are priced at £0.155p each on TradeGecko.com.
Tony is taxed on earnings of £2,100 being the market value of TIVA tokens of £3,100 less the price paid of £1,000.
Founder crypto tokens
Where you receive founder tokens you will potentially be subject to income tax on the value of these tokens as you will have effectively not paid full market value for them. However if they are issued at a time where their value is negligible or you paid full value for them, any subsequent increase in value will be subject to capital gains tax.
What about the sale of cryptocurrency awarded to your employee?
Generally speaking an employee will pay income tax on the value of the cryptocurrency when it is awarded (either as employment or non-employment related) less any amounts paid. Any subsequent increase in value will be taxed as a capital gain.
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