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Tax Aspects of Cryptocurrency-Based Compensation to Employees and Service Providers

Share-based compensation is the most popular reward method among employees and service providers in many industries today, especially the high-tech industry. From the grantee’s point of view, the receipt of options enables a significant reward and profit source if the startup grows and has a successful exit event. From the company’s point of view, the granting of stock options is a tool to incentivize employees and service providers and to reduce the gap of interests between managers and employees.


Similarly, token-based compensation to employees and service providers has been growing in recent years. However, unlike share-based compensation via options, according to Israel Tax Authority (ITA) instructions and guidelines, token-based compensation does not meet the scope of the provisions of section 102 of the Israeli Income Tax Ordinance (ITO). Namely, section 102 does not apply to this type of compensation. This means that the 25% capital gains tax rate pursuant to the Israeli special options regime will not apply to these tokens, which ostensibly originated from capital compensation. Rather, said token awards will be subject to the ordinary marginal income tax rates on the grantee’s annual earned income (plus national insurance and health tax if applicable).


The ITA published the circular “ICOs – Issuances of Digital Tokens for the Provision of Services and/or Products under Development (Utility Tokens) in November 2018. This circular briefly discusses the tax implications and outlines the following provisions:


The date of the tax event:

The tax event arising from the issuance of the tokens will be at the earlier of (i) the exercise date of the inherent right in the token, or (ii) the date of the token’s sale (including exchange tokens).


Classification of income:

Income will be classified as employment income or business income, rather than capital gain income, in accordance with section 102 of the ITO, as described above.


Another alternative:

Notwithstanding the above, an additional alternative exists. Subject to the applicable terms, on the date of issuance the tokens a company may elect the ordinary income route, and charge the employee with marginal tax rates of employment income. Thereafter, any income derived from the actual sale of the tokens will be subject to tax as capital gain income or business income, all in accordance with the employee’s actual status at that time. For example, business income tax (usually at higher tax rates) will apply, if the income derives from business activity of the employee. Capital gains tax (usually at lower tax rates) will apply if the income derives from a capital asset, other than from the employee’s business activity.


Withholding tax:

Issuing tokens to employees is subject to the a company’s withholding tax obligations under the ITO and its regulations.


Please bear in mind that drafting employee stock option and token awards, as well as any related documents, including the grant agreements themselves, requires consultation with an attorney proficient in taxation and commercial/startup laws. Several material issues may arise during the drafting of such documents, including the date of the tax event, the vesting period and terms, the rights of the employees/service providers as shareholders subsequent to the grant, the exercise price, the lock-up period, etc.


These matters may seem obvious or minor, yet drafting these documents without tax law expertise and knowledge of the relevant legal-commercial aspects may have a considerable impact on the terms of employment or the engagement of the grantee. Badly formulated drafts can turn a great job offer on paper into a terrible one, and a company’s great deal can turn into a tricky one for its employees.




Barnea Jaffa Lande’s Tax Department is at your disposal to assist you with all matters involving cryptocurrency-based compensation and any other tax matters.