The biggest challenge in the pandemic is to keep the best workforce up and running instead of them falling into competitors hands. With some listed tech start-ups doing wonders to the bank account of promoters and employees recently, the new age start-ups into blockchain arena, are dolling out their own tokens and offering these as part of their employees’ annual income – along the lines of employee stock ownership plan (ESOP).
Token incentives are attractive to the employers as it does not dilute their shares and is also quite popular among the employees since the tokens could significantly increase in value. These tokens or cryptocurrencies or digital assets issued to employees by crypto exchanges as incentives are set to come under the taxman’s lens. Tax experts say while the arrangement may look similar to an ESOP; it will not be treated as one under the tax laws but will be treated as salary income based on their actual market price in the year of receipt.
The silver lining in this is that if there is an element of deferred compensation as per contract, then the incidence of taxation will be shifted to a future date depending upon the contractual terms.
Under normal ESOPs, tax liability is in two stages under the Income Tax Act, 1961:
- When Exercising an ESOP Option: At the time of exercising options and conversion into equity, it is chargeable as perquisite as tax being Excess of Fair market value (FMV) of the share (on the date of exercising the option) Over Amount recovered from employees for such shares (exercise price).
- When the employee sells the share: at a higher price than the ESOP price the same is treated as capital gains being difference between Price of the shares sold and Price on the date of exercise of the option. Tax rates will vary depending on the type of capital gain (short term or long term).
NPowersU Expert Opinion
New age era is evolving at such rapid speed but the taxman and law makers are caught off guard. Relevant legislations and relevant Acts like Cryptocurrency Bill are still in discussion stage. But where world is global village, no economy can wait for want of decisions and directions. Non Fungible Tokens (NFT) is yet another new era asset which has already started creating waves in the market place based on the blockchain movement. Citizens are eagerly waiting for direction from the government even though speculators and over-zealous risk takers have already taken positions in the same as on date.
Hope the government agencies ‘wake up on the right side of the bed’ soon.
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