There is as yet no specific UK tax legislation relating to the tax treatment of tokens so general tax legislation and case law have to be applied to this fast moving area.
Applying these general principles, the tax treatment will depend first on whether the tokens you are being offered are exchange/ payment tokens (which are effectively cash in another form and taxed broadly in a similar way to a cash payment), utility tokens (which provide the holder with access to goods or services) or security tokens (which give the holder an interest in the business, such as a right to share in profits). Secondly the tax treatment will depend on whether the tokens are what are known as readily convertible assets (RCAs). A RCA is an asset for which there are already trading arrangements or where trading arrangements are likely to come into existence. So if a token is already being traded on an exchange or is expected to be traded it will be an RCA.
If the tokens you are being offered are RCAs, your employer will be responsible for accounting for tax on the value of the tokens being provided to you. The employer will have to deduct (to the extent possible) income tax and employee Class 1 primary national insurance contributions from your salary in the month that the tokens are made available to you (and will also pay employers Class 1 secondary national insurance contributions). If the full amount of tax cannot be deducted from that month's salary you will need to reimburse your employer for the excess income tax and employee national insurance contributions by 6 July 2023 assuming the tokens are issued this tax year. If, unusually, the tokens are not RCAs you, rather than the employer, will be responsible for paying income tax through your self -assessment tax return and your employer will need to pay Class 1A national insurance contributions.
If what you are being offered are security tokens particular care needs to be taken to determine the right tax treatment, especially if your tokens are restricted (e.g. they are subject to good and bad leaver provisions). You are likely to be treated in the same way as if you had received restricted shares as an incentive and you and your employer should consider whether you can and should make what is known as a section 431 election. This may (depending on the value of the tokens issued to you, determined on the basis that there are no restrictions) mean that you suffer an up- front income tax charge but the advantage of making the election is that future gains are subject to more favourable capital gains tax rates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.