Blockchain Companies have started Employee Token compensation scheme towards it employees. This is similar to ESOP - Stock option plan but instead of allocation equity shares Web3 Companies allocates it tokens

This innovative approach to compensation raises important questions about the taxation implications. Two critical points need to be considered here: the tax impact at the time of token allocation, and the tax impact when these tokens are sold.

1. Taxation at the time of Exercised / Vesting is completed

According to the income tax laws, specifically section 56(2), if any asset is received at a value less than its fair market value, it is considered as income from other sources. Thus, when the vesting period of the BCUT tokens is completed and the tokens are allocated to the employees, the fair value of these tokens at that time needs to be declared as income from other sources. This means that the employees will have to pay tax on this income.

Example :

As a part of your Token allocation , Following tokens are unblocked, 1000 token in 15th July 2024 , 1000 token in 15th Nov 2024 , 1000 token in 15th Mar. Then following income needs to be offered in Income tax

Date of Allocation No of Token Fair value of the token Total value ($) Total value (INR)
15 July 2024 1000 $0.8 $800 65,600
15th Nov 2024 1000 $1 $1000 82,000
15th Mar 2024 1000 $1.5 $1500 1,23,000

(Exchange rate is assumed to be Rs 82 per dollar. However one needs to check the relevant exchange on the date of such transaction)

Thus in the above scenario tax payer has to Rs. 270,600 as income from other source - Schedule OS of Income tax return



2. Taxation at the time of Sale of such Token

Section 115BBH of the income tax laws comes into play when such tokens are sold for Fiat or other Digital Assets.  Capital Gain tax will be applicable when such token are sold and tax @ 30% will be levied u/s 115BBH on such gain

eg. In the above example on 30th Aug 2024 taxpayer decides to sell the token @$0.9 per token which was allocated on 15th July 2024. Computation of capital gain will be as follows


In the above computation , Cost of acquisition of the token needs to be done on FIFO basis and express disclosure needs to be provided in Schedule VDA of Income tax return.

As per Section 115BBH , Loss in one category of digital asset cannot be set off against the profit of another digital asset. Thus one needs to be extremely careful while executing the trades

Advance tax Applicability : 

Since there is no withholding of tax at the time of such token allocation , Employee will need to pay the income tax at the time of completion of allocation and at the time of sale voluntary via the mode of Advance tax. Income tax needs to be computed and tax needs to be paid off using Challan 280

Conclusion :  

Considering the complexity of these transactions and the taxation rules that apply, it is essential for the employees to maintain detailed books of accounts. Keeping a clear record of the token allocation, the fair value at the time of allocation and sale, and the capital gain will help in ensuring compliance with the tax laws and avoiding any potential legal issues.