The allocation of tokens to founders, employees and contractors of crypto projects often lead to several tax-related issues. The tax assessment is complex and depends on various factors such as the contract terms and the tax classification of the token as a utility, payment, or asset token. It is therefore advantageous to consider the tax challenges of allocating tokens to team members at an early stage.
Background
In the dynamic world of crypto projects, tokens are not only digital assets. They can also be used as an incentive tool for founders, employees, and contractors, similar to employee shares.
In practice, it is not uncommon for founders of a project to have high expectations of the token to be created already in the concept phase and therefore allocate the future token to the founding team in early stages. These tokens serve not only as an incentive tool for future activities, but also as a reward for the success of the project and its development so far. These promises are usually made before the legal entity is established.
In many cases, employees in management positions or team members who joined in the project's early stages also receive tokens as an integral part of their remuneration package. This also applies to contractors who provide their services on the basis of a contractual relationship. The corresponding incentive programmes are usually combined with vesting, blocking and/or cliff provisions to incentivise long-term commitment and avoid immediate token sales after allocation.
Combining token incentives with project success strengthens the loyalty of participants to the company. However, practice shows that vague wording and unclear contractual provisions can lead to uncertainty regarding the tax implications.
However, a clear and transparent token allocation is crucial to avoid conflicts of interest with other token holders and the community and to ensure the trustworthiness of the project. In practice, founders and project members should therefore create clear and comprehensible rules for the allocation of tokens.
Vesting Period
Vesting, as a time-based mechanism, defines the step-by-step allocation of tokens to the respective counterparty according to a specific schedule. This process ensures that founders, employees and contractors first have to earn their tokens and therefore only receive the power of disposal over them after a contractually defined period of time or after defined milestones have been reached.
Blocking Period
Blocking (or locking) prevents - in the sense of "restricting transferability" - quick sales of (already allocated) tokens by setting a time frame in which team members are not allowed to transfer or sell their tokens. This provision aims to ensure that team members cannot flood the market with token at the end of the vesting period and thus have an influence on market pricing.
Cliff Period
Finally, the cliff period is a kind of "threshold" in terms of time that must be exceeded before the allocation of tokens can take place. The concept of the cliff period is often used in the context of vesting plans in start-up companies and crypto projects to ensure that participants work for the company for at least a certain period of time.
Tax Considerations
In addition to the contractual considerations outlined above, a key aspect in the design of these incentive programmes is the early consideration of project-specific tax considerations for both the issuing company and the beneficiaries. In Switzerland, these include in particular value-added tax (VAT), individual income tax of the beneficiary, and income tax for the issuing company.
The VAT considerations of token allocations depends essentially on the category of the allocated token. In the case of a utility token in particular, it should be noted that allocation to beneficiaries domiciled in Switzerland may lead to a VAT liability for the issuing company. Similarly, services provided by contractors domiciled abroad and without their own Swiss VAT number result in VAT liabilities (acquisition tax) for the company domiciled in Switzerland, irrespective of the token qualification.
To determine possible income tax consequences for the issuing company, the decisive factors are the market value of the token, the value at which the tokens are booked in the financial statements, at which time a corresponding expense must be recognised and whether the issuing company is a stock corporation, a limited liability company, a foundation or an association are decisive factors.
Finally, Swiss individual income tax applies to beneficiaries who reside or work in Switzerland and have an employment contract with the project company, as well as contractors who are deemed to be self-employed and have their tax domicile in Switzerland. The market value of the transferred tokens is subject to income tax and social security contributions. The value of the token is generally determined at the time the power of disposal is transferred, which is not always easy to determine in practice. In principle, in the case of direct allocation or subsequent vesting, the relevant date for tax purposes should be the date on which the tokens can no longer be taken away from the beneficiary on the basis of existing contractual agreements. Blocking periods, on the other hand, do usually not impact the date of taxation, but are taken into account as a reduction in the valuation.
Overall, it is evident that (early) token allocations can be advantageous from both a project and tax perspective. They not only serve as tools to incentivise, but also as an effective strategy to create a committed and sustainable company and are usually a key component of a successful project. Despite these advantages, however, it is advisable to assess the tax implications for the company, founders, employees, and contractors at an early stage. This enables any necessary adjustments to be made before the contract is signed and minimises the risk of unexpected tax surprises.
