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Tokenizing Salaries and stock options – Considerations for compensating employees in cryptocurrencies

Tokenizing Salaries and stock option for compensating employees

If we were to live in a world driven by Artificial Intelligence run on Blockchain, we cannot rely on old methods of commerce. One of these is how compensating employees in advanced way.

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Binance compensating employeesBinance made news when they disclosed that 90% of their employees choose to get paid in BNB Tokens. There were many companies that disclosed that their employees were given a choice of receiving a portion of their salary in Cryptocurrency.

While 2018 was a letdown year in the cryptocurrency space, it has been an encouraging one for the Blockchain space in general. Many of the Fortune 500 companies have been exploring the use of Blockchain technology in their business.

In view of the potentiality that we may see employees getting paid in cryptocurrencies, we will look at various aspects related to tokenizing salaries.

In this article, we will discuss:  

  • Legality of virtual currency in your country
  • Does your country allow it?
  • Will you pay in tokens, coins or stable coins, and why it’s important to know?
  • Benefits of paying in Crypto
  • Pitfalls of paying in Crypto
  • Can you pay 100% in Cryptocurrency?
  • Legally written consents from employees
  • Volatility as a primary factor
  • Tokens in lieu of stock options
  • Lock-in considerations
  • Insider trading considerations
  • Sec 83(b) considerations
  • Signature considerations
  • Employee advance tax payment considerations
  • Valuation considerations
  • International workforce
  • Don’t forget the Tax withholdings

Legality of virtual currency in your country for compensating employees

Virtual currencyThe first question you need to answer before going Crypto compensation route is the legality of virtual currency in your jurisdiction.

For instance, China and India have not taken a friendly stance on crypto and it is a good bet that, at this time, these countries would not allow salaries paid in Crypto.

In the United States, you have to be careful about the minimum wage and State regulations requirements of the State in which you operate and whether that State particularly allows you to pay in cryptocurrencies.

Good References here:

https://blog.goodaudience.com/can-you-pay-your-employees-with-cryptos-96d37195b226

https://www.blockchainandthelaw.com/2017/12/legal-ramifications-of-paying-employees-with-cryptocurrency/

Does your country ALLOW it?

crypto friendly countryJust because crypto is not banned or even encouraged in the fintech space in your country doesn’t automatically grant you rights to pay in crypto.  For instance, the basic compensation payout may be forced to be paid in ‘fiat’ currency.

Supplemental income like bonuses, allowances or stock options etc. may be allowed to be paid in whatever employer and employee agree on, including virtual currencies.

IRS Notice 14-21  clarified that virtual currency can be remitted for goods and/or services received, including wages.  However, both Federal and State regulations may need for a certain amount of income to be paid out in fiat currency to meet the federal, state and social tax withholding obligations since most of the States do not accept crypto tax payments.

Germany has opined that claim for salary remains outstanding if it is not settled in Euro, however, it doesn’t imply a prohibition on paying in crypto for benefits-in-kind (benefits that Employer chooses to pay but is not obligated by law).

Will you pay in tokens, coins or stable coins, and why it’s important to know?

pay stable coins compensating employees

Another good reference here:
https://www.nanalyze.com/2018/09/utility-tokens-vs-security-tokens/

Tokens can be further segmented into utility tokens and security tokens.  Paying compensation with utility tokens may not pose many complications (other than your compensating employees agreeing to receive them in-lieu of compensation), however, paying in security tokens will need to be in line with stock option rules, including statutory income tax withholding implementation (which still happens in traditional fiat).

When you pay out in coins, the fair market value as of the date/time of the payout is captured for compensation reporting purposes.

Stable coins probably might become a staple thing in the crypto space since they fit both the notion of ‘crypto’ and guarantee of ‘fiat’.

How the accounting, payroll, tax withholding, and payout structure works really depends on what you offer to your employees.

Obviously, there is ample room for interpretation since most Government agencies around the world, including the United States, have not provided clear guidance around token salaries or other forms of crypto transactions.

Benefits of paying in Crypto

advantages of crypto

Why talk about paying in Crypto unless they provide certain benefits?

Here are some:

  • Increases employee engagement: when you know the value of your tokens (similar to stock options) depends on the success of your company

 

  • Increases employee retention: the tech industry faces one of the worst retention rates, having conditional vesting of crypto (in the format of stock options) helps retain employees for the long run
  • Global demand: Unlike stocks, you are not restricted to just one geographic location – you can sell your crypto on exchanges that trade and have a global market place. Of course, this global demand is true for successful projects
  • Long-term compatibility: Bitcoin went from $1800 in Mid 2017 to $19000 by the end of 2017 and settled around $4000 by end of 2018.  If you were to just look at year on year trajectory – Bitcoin has done marvelously well than any other asset class, however, imagine getting paid in Bitcoin when it was $19,000 and sitting on it today when it’s only worth $4,000.  That kind of massive volatile risk is not an issue with fiat incentives or traditional stock options.  If you tie company tokens as an incentive – it could encourage employees to stick around longer and work harder.

Pitfalls of paying in Crypto

Disadvantages of crypto

It’s not all rosy and dandy – there are some pitfalls of paying in crypto:

  • Freefall Crypto can fall to a value of zero.  Many projects since their inception have. For this reason, employees may not want to be paid in a currency that may one day have no value
  • Lack of regulatory guidance: Recent SEC actions have put crypto space in a panic state. No one knows what type of action SEC is going to take against Crypto companies and how that impacts the value
  • No protection: Federal Trade Commission has been warning people about the volatility issues with transacting in Bitcoins, FTC has even warned that there is no government protection available to people dealing in cryptocurrencies that are otherwise available to traditional financial instruments.

Can you pay 100% in Cryptocurrency?

As we discussed earlier, and it bears repetition, many jurisdictions have restrictions on how the base pay is paid.  This restriction makes sense in the current economic model since most Government, especially National agencies, have not come to accept cryptocurrencies as legal tender.

The answer for most jurisdictions is that – you cannot pay 100% in cryptocurrency.  Even for most progressive companies and employees – this restriction acts as an anchor to the old fiat system.

Legally written consents from employees

As progressive and accommodating as your employees may be – it is very important to have written confirmation that your employees have agreed to receive their bonuses and supplemental wages in cryptocurrency (whether it is your own company tied crypto or crypto from the market).

Having written consents that disclose the risks of accepting cryptocurrency in the current financial system and possibility of them losing all of their value and point about them being issued at fair market value at a certain date are all important aspects you want to include in the letter, will help you any legal proceedings down the line.

Volatility as a primary factor

crypto volatility

If you ask HODLers – they will tell you that ‘Volatility is the worst thing’, while day-traders may say volatility is the only reason they are in Crypto space.

Employees are different than HODLers and traders – they have other tasks to do – like making your project successful.  When thinking to issue tokens in lieu of compensation consider incorporating some kind of safety threshold so that employees are not always worried about the market, that takes their focus away from the project.

This safety threshold might include – locking some value of crypto in stable coins or having collateral in fiat, or tying physical assets (like real estate) to the tokens issued, etc.

Tokens in lieu of stock options

crypto and stocks

We expect 2019 to be the year when Security Tokens (STOs) will become popular.  STOs will mark a massive shift in the financial market and how capital is accessed.  When the rules become clearer – companies working in the crypto space can legitimately use ‘crypto’ instead of traditional securities.

For now, based on what we know to apply for the traditional stock options, here are a few considerations you must think about when paying stock options in crypto: 

  • Lock-in considerations
    • How long does it take for the restrictions to pass? Is it too soon or too taxing?
  • Insider trading considerations
    • Being so integral within the company – will you run into insider trading issues down the line? Will tying employees with crypto backfire when an insider trading news breaks out?  What countermeasures do you have in place to save the brand/company?
  • Sec 83(b) considerations
    • Will employees have the option to elect 83(b) election? Many industry experts weigh in that restricted tokens should fall within the purview of 83(b) that help taxpayers make the election to get taxed on grant instead of at vesting.  The clock for capital gains treatment then starts on Grant date.  This is a positive thing for the company because the employee is betting on an increase in company and its tokens worth.

From employees standpoint – this is a risky deal especially if the said tokens fall in value – the taxes paid ahead on ‘fair market value’ will not be recoverable.

  • Signature considerations
    • How are you collecting signatures when (and if) you end up issuing security tokens with restrictions? What framework do you have to issue security tokens and have employees provide their consent to the vesting schedule and restrictions?
  • Employee advance tax payment considerations
    • All of our discussion assumes that employees are willing and able to pay taxes in regular fiat while receiving stocks in tokens. Even if employees want to sell some of the crypto tokens to pay for taxes – there may or may not be market to trade for specific tokens. In such a situation – how are employees going to accommodate tax payments?

Valuation/liquidity considerations

2018 crash of crypto market is a stark reminder for all of us as to how things can turn.  Many projects were wiped out of the crypto world due to liquidity issues.  What happens if your company faces such a crisis and there is no one to buy the tokens?  How then are these employees going to be made good?  Is there a buy-back program? If so, will the company be able to sustain such plan and still thrive in business?

International workforce

crypto adoption

Companies like Bitwage and SalPay are accommodating paying in crypto and seamlessly convert them into fiat (or other cryptos) on the receiver’s side, no matter where the receiver lives.  They boast the ability to comply with the payroll regulations in many jurisdictions.

Of course, there is the cost of service, but if successful, the cost may be minuscule compared to the benefits.

International wage settlement will become much simplified when cryptocurrencies are used, as they are valued/accessible/deliverable globally.

US dollar will not be the same in India but Bitcoin is a Bitcoin no matter which part of the world you live in.  While we are still working on adoption – once crypto is accepted in more locations – these international pay settlements in crypto could become THE norm.

Don’t forget the Tax withholdings

As an employer, you are required to withhold taxes on ALL income paid to employees.  This means – both employer and employee tax remittances have to be made in national fiat currency.  Do you have a plan and reserves to meet these withholding requirements in fiat while you deliver some of the compensation items in crypto?

Conclusion: Bringing it all together

As you can see, a simple idea of compensating employees in cryptocurrency carries with it a staple of complex payroll, tax and compensation considerations that need to be addressed with professional help.  Ask all the questions ahead of time and not after hitting a regulatory wall.

It is possible to pay in crypto, as long as the all legal and regulatory aspects are addressed.

All of these complications will be eventually addressed in the crypto space and we will see companies joining forces in paying employees in tokens, whether its utility tokens or security tokens.

Thank you for reading this article.

IMPORTANT DISCLAIMER

Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.

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About the author

RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.

RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.”  Of course, that is just his opinion.


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