Incentivising employees with crypto assets

The use of cryptocurrency or crypto assets in employee incentive arrangements is a relatively new and evolving area and it is therefore important to carefully consider the potential advantages and disadvantages of their use in incentive arrangements.

Different types of crypto assets

Crypto assets can take many forms including digital currency such as Bitcoin and Litecoin and NFTs (non-fungible tokens) such as art NFTs and collectible real estate NFTs. The broad range of crypto assets opens up new possibilities for employers looking to recruit, incentivise and retain employees through the use of crypto.

Advantages of using crypto assets in employee incentive arrangements

Some of the potential advantages of using crypto assets in employee incentive arrangements include:

  • Ease of cross-border transfers: Crypto assets can be easily transferred across borders, making it a convenient choice for companies with a global workforce.
  • Potential for high returns: Some forms of crypto currency have performed very well and achieved high returns. Over the 4 year period (being a typical lifespan of a long-term incentive) from 2020 to 2024, the value of the 2 most popular forms of cryptocurrency (by market cap), being Bitcoin and Ethereum have had a 5x  and a 15x  increase respectively.
  • Customisable incentive structures: Crypto assets can be used to create customised incentive structures, allowing companies to tailor their incentive arrangements to the specific needs of their workforce. For example, a vesting period or similar restrictions could be imposed where the employee cannot immediately access and realise value from the crypto assets. 
  • Different to standard forms of incentives: most long-term incentives take the form of either (1) equity (shares or share options), but that dilutes existing shareholders and are themselves subject to complex tax rules; or (2) cash, but that can be expensive for a company when factoring in employee and employer taxes. Crypto assets don’t impact other shareholders and while there is a cost to the employer in obtaining the asset, it may be able to hedge its position and acquire it when there’s a dip in the value. There is also the “novelty factor” of employees acquiring something they may not have come across before.

Disadvantages of using crypto assets in employee incentive arrangements

However, there are also potential disadvantages to using crypto assets in employee incentive arrangements, including:

  • High volatility: Crypto currency is known for its high volatility, which can make it a risky choice for companies and employees. It is not a particularly effective incentive if the crypto asset falls significantly in value through no fault of the employee.
  • Lack of regulatory oversight: The lack of regulatory oversight for crypto assets can create uncertainty and risk for companies using these assets in their incentive arrangements.
  • Potential tax implications: The tax treatment of crypto assets varies by jurisdiction, and companies need to carefully consider the tax implications of using these assets in their incentive arrangements.

Tax considerations for using crypto assets in employee incentive arrangements

The tax treatment of crypto assets varies by jurisdiction and is a rapidly evolving area as tax authorities grapple with how best to treat these forms of digital assets.

In the UK, crypto assets are generally treated as property for tax purposes. This means that any gains on the disposal of crypto assets are subject to capital gains tax above the annual CGT threshold. HMRC have recently opened a dedicated disclosure facility for people needing to declare previously undeclared crypto gains.

Additionally, if an employee receives crypto assets as part of their employment income, the value of the crypto assets at the time of receipt is subject to income tax and National Insurance contributions.

Conclusion

It is important for companies to carefully consider the pros and cons of using crypto assets in employee incentive arrangements and to seek professional advice in this area. Companies should ensure that they are complying with all relevant tax and regulatory requirements, and that the incentive arrangement is structured so it provides an effective tool to recruit and retain employees.


1 This data has been obtained from https://blockworks.co/price/btc
2 This data has been obtained from https://blockworks.co/price/eth

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

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