Token Valuations 101: What you should know
Issuing tokens to employees is a great way to attract top-level talent and align project and contributor incentives. But how do you ensure that you are compliant with the IRS in the currently murky regulatory environment? After you read this article, you will learn the following:
- Token Valuation basics
- When a project needs a Token Valuation
- How often to get Token Valuations
- Where to get a Token Valuation
What is a Token Valuation?
A Token Valuation is a third-party appraisal of a cryptocurrency token's fair market value (FMV). Token valuations may be necessary when a project or company decides to grant employee compensation in the form of token assets. This is because the IRS requires an established FMV within close proximity to the grant date in order for the grant to be considered valid.
Simply put, any company issuing tokens to employees will likely require a Token Valuation.
Why do I need a Token Valuation?
Token Valuations may be necessary in order to comply with the IRS and other regulatory authorities. There can be severe financial consequences for you and your employees for instances of non-compliance. If the IRS has determined that your Token Valuation does not meet standards, all of the tokens granted to employees will be subject to gross income tax. The IRS can also levy up to a 20% penalty on top of the back tax.
What if my token is publicly traded on an exchange?
Even if your token is trading publicly, there may be benefits to getting a token valuation. Notably, if there are lockup periods associated with the tokens granted to employees, there may be a material discount between the market price and the FMV. The idea here is that since the holders of the tokens cannot sell immediately in liquid markets, their assets are worth less than what they are trading for today. This can have significant (and favorable) tax implications for your employees down the road.
How often do I need a Token Valuation?
A Token Valuation report is valid for up to 30 days from the valuation date or whenever a material event occurs - such as the public launch of the token. In order for a company or project to be compliant with the IRS under "Safe Harbor" status, the Company needs to have a valid FMV during any token distribution event.
In summary, if you are getting ready to issue new token grants (to employees or investors), or are preparing for a token distribution, you'll likely need to get a new Token Valuation.
This sounds like a 409a Valuation?
You're right, this is extremely similar to a 409a. Both Tokens and Options issued to employees are a form of deferred compensation. Just as 409a valuations are necessary to issue options, Token Valuations are necessary for issuing illiquid tokens to employees.
Where can I learn more about Token Valuations?
Watch the recording of our latest livestream with one of our in-house token valuation experts here:
How do I get a Token Valuation through Pulley?
Schedule time with our Token Valuation experts to get started on your report.