Are you thinking of rewarding your employees in the form of "cryptoassets" (otherwise known as cryptocurrencies)? Or have you made this type of award already? You should think carefully when doing so, as there may be tax consequences which you had not anticipated.
We had suspected that it would only be a matter of time before HMRC announced that cryptoassets would be taxed. HMRC have now released guidance confirming this, and outlining how they expect the tax treatment to work.
Broadly speaking, when an individual receives cryptoassets from their employer, income tax and national insurance contributions (NICs) are likely to arise, and the employer company may be obliged to operate Pay As You Earn (PAYE) income tax to account to HMRC for this liability.
If you have already awarded cryptoassets to your employees, you should seek advice on whether any tax should have been paid in connection with these awards to ensure that you are not in default in respect of your PAYE obligations.
If you are thinking of making awards of cryptoassets to your employees, you should consider the possible tax consequences of doing so.
HMRC have confirmed that income tax is likely to be payable on the value of the cryptoassets when they are received by the employee. Certain cryptoassets (including Bitcoin) may also give rise to NICs and PAYE obligations for the employer company, but this will not be the case for all types of cryptoasset.
When the employee eventually sells or transfers their cryptoassets, they are likely to be subject to capital gains tax on any growth in value of their cryptoassets. For further details on cryptoassets and their tax treatment, please see our previous article.
Something we are yet to see is companies granting options over cryptoassets. However, if options were to be granted over cryptoassets, we would expect the exercise of these options to be subject to income tax (and most likely NICs).
Cryptoassets may not, therefore, be the most tax effective form of employee incentive award. For example, awarding Enterprise Management Incentive options to employees over shares in the company (provided the company qualifies to do so) could be much more tax efficient, as the gain the employee makes on their option should remain within the more favourable capital gains tax regime.