Utilizing cryptocurrency or tokens to compensate employees, advisors, or board members can be a complicated process and understanding the salient issues when planning for these distributions has never been more important. Specifically, when it relates to taxes.
The View of the Internal Revenue Service
In 2014, the Internal Revenue Service (IRS) provided initial guidance about the tax principles associated with virtual currencies such as Bitcoin or Ether (Internal Revenue Service Bulletin 2014-16, Virtual Currency Guidance). While the regulatory framework surrounding virtual currencies continues to evolve, the IRS has maintained that virtual currencies are considered property and that general taxation regulations still apply.
Many companies pursuing token offerings structure them such that a portion of tokens are distributed to employees, advisors, or board members. Such distributions are taxed as compensation by the IRS (e.g. federal and state income tax withholding, federal insurance contributions act taxes, federal unemployment taxes, etc.). Depending on the size of the distributions, the potential tax liabilities could be significant to both the company and the individuals to whom the tokens are distributed. Furthermore, penalties at as much as 15% may apply if tax payments are not made in a timely manner (Internal Revenue Service Publication 15, Employer’s Tax Guide).
How can we help?
Teknos has assisted several companies undertaking the token offering process, and it is from this experience that we have developed a unique understanding of the right valuation methodologies that can mitigate the potential tax impact of a token sale. To learn more, please contact us at firstname.lastname@example.org.
Teknos Associates provides valuation and advisory services for emerging growth companies and their venture capital backers. Clients rely on our financial expertise, knowledge of technology markets, and high standards to deliver relevant and timely valuation reports, opinions, and analyses.
Special Note: From time to time, Teknos Associates has been retained by the Internal Revenue Service to perform valuation services. However, nothing in this communication may be taken to represent the official position or policy of the IRS. The opinions expressed herein are those only of Teknos Associates.
IRS Circular 230 Disclaimer: Pursuant to regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service, unless otherwise expressly stated, any U.S. federal or state tax advice in this communication (including attachments) is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of (i) avoiding penalties that may be imposed under federal or state law or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein.