DappCon 2023: Token incentive plans & tax compliance made simple - Stefan Stadlinger

Transcript

hopefully every everyone can hear me and um you know in my mind this is going to be the most exciting hour here first we had Ai and blockchain now we have crypto and tax compliance so two two things very close to my heart um but good afternoon G nak my name's uh Stefan stadlinger I'm head of product here at toku um it's great to be here in Berlin again thank you for the nosis team for setting everything up um it's also great to see some EU clients and learn a little a little bit about um some things that I don't know too much about although I know a lot about token and tax compliance um so here at toku kind of our goal is is to make to token compensation simple and one of the key

crucial things that we address is how to legally and compliantly pay people in tokens um wherever they were located and no matter what size you are whether you're a startup that's just starting out or one of the or a larger Enterprise organization and so to kick things off I want to start off with a little audience poll so if everyone could raise their hand if they've received token compensation in any form that could be versus a salary a bonus token award a token option agreement um really whatever because I want to start gauge a little bit um so cool probably about a quarter here which is great so we'll probably talk about a few things that resonate um with that quarter but for

those who haven't it's also great because we'll all learn something here today um so it's Al important um and so today we're going to be talking about um we're going to be talking about various uh types of structuring considerations when it comes to token compensation as well as um you know the resulting tax obligations so um starting off with the what the why the when and the how um and so you know where we see token compensation is that it's relatively new right these structures when we talk about token incentive Awards salaries token salaries Etc have really only been around for about 10 years now and they're very complex from a regulator

from Regulatory and legal standpoint as well as from a tax perspective as well and you know one thing we do know that is that governments are slowly starting to catch up um here in Europe you see Micah in the US which is a little bit uh you know slower when it comes to regulations you see numerous enforcement actions um court rulings proposed bills IRS rules that are slowly starting to come up the pipeline um and regardless where any of that lands one thing we know for certain is that governments are closing the gap on uh token taxes and paying taxes on token compensation is going to be very as important as ever going forward um regardless of where the regulatory um you know landscape ends

because you know not you know I don't know and me being from the US I don't know and I don't think a lot of people in the US know where we're they're going to end on the regulatory story stand front um but in any case so you know and at toku kind of what our mission is to make that as simple as possible and really provide this end to-end solution um right now there's certain like web 2 Solutions out there that will address like a portion of this issue like on the employment side you have companies like dealer remote on the grant Administration side you have companies like Carta or shareworks that will do a portion of it but none of them are really Crypton native and they're only going to really address a portion of the problem um regarding crypto compensation and so you know when I'm up

here and I'm talking about crypto grants like what am I even talking about well you know we can go back to the web 2 world and look at uh share Awards stock options that are very prominent in early stage startups OR tech companies um and when we talk about that in the crypto world it's the similar structures uh but instead of getting shares in a company you're getting tokens in a project um which is great right you align incentives and you're able to give your team um the upside in your project assum you know assuming your token price appreciates in your project as well right um while they are similar there's some differences which we'll also get into as well um so we talked a little about the what we talked about the why

and now we're going to go to the when when should I start thinking about these things well the answer was probably yesterday and the reason for that is because the earlier you think about these sort of structuring issues um the greater benefits you'll have later on down the road right um you know and and so like in terms of our clients what we work with we work with some early Pre-K uh pre- token launch startups to some of the bigger l1s that have a globally distributed team and the reason why it's important is that you know depending on the structure you you choose at the right time of your token whether it's pre-launch or postlaunch can potentially save you know millions of dollars of tax incentives of tax payments for both you

as the grantor of the of the tokens and the recipients your employees Etc right so very very very um you know important considerations there so moving on to the how um you know you might be saying okay well you know I have a token plan I've talked to some lawyers and I kind of understand uh you know what I'm doing here um but I'm not really sure so um you know while it's complex I really want to boil it down to like three simple points right one is on the legal side getting uh legal contracts in place the other is on the vest in tax obligations Port portion and then lastly on the token distributions meaning how operationally are you actually delivering these tokens right all separate topics but also very

important so on the legal contract side we mean so what kind of uh legal templates do you want right there's a whole ocean of potential ways that you can structure token grants you have token Awards restricted token units um token options token appreciation rights like whatever um there's call call whatever you want but at the end of the day um you need to come up with the right legal structure that's right for your token at that point in time right and a lot of that is dependent on the token Lifest cycle are you pre-launch are you post-launch is there a tradeable market for your token what is the value of your token right all of these things are important to consider um because ultimately they're going to affect how you deal how you distribute your token

your operational concerns as well as the tax obligations as well um so that's on the legal side on the investing in tax obligation side when we think about investing we're like okay how long of a investing period do you want do you want a cliff do you want to vest onchain versus offchain um all those things are important to consider when you're um you know think thinking about these vesting considerations um on the tax obligation side really a function of all your legal and uh vesting decisions that you've just made right because tokens are typically taxed when they're delivered um depending on you know obviously the country and you know your specific setup are you a contractor employee whatever your employment status is right all of these things are important um so that's

investing in tax obligations and lastly we have token distribution SL operational side right how do I like when do I settle my tokens right because investing and settlement two different concepts um when settlement is actually when you deliver the tokens to the employee so when do I settle right who do I pay my taxes to how do I know the right amount of taxes that I need to pay pay um and you know what or the what tax authorities do I need to go and actually facilitate these payments to right all very kind of important considerations when thinking about okay you know I have a token Grant how do I structure it how do I maintain it and how do I operate it um so maybe up until this point you've been thinking all right well simple

enough you know I go out talk through a few lawyers figure out my contracts and you know keep these three things in mind and then I should be set um well unfortunately not really um I know this slide is a little bit overwhelming um but it's just a subset of kind of some of the questions that need to be considered that we deal with on a day-to-day basis right taxes are tricky it's not it's not simple especially when you have um a team that's distributed around the world right each country just taxes differently um and tokens itself are tricky right and it's there's all this complexity that's out there um that you need to take into consideration when um administering and offering these grants um so good news is is that there

is a solution um and that's part of the key mission of toku here is simplifying this whole spectrum of token compensation and tax compliance and the way that we do it is you know we've spent thousands and thousands of hours with lawyers to try to figure out okay how do I uh compensate legally compliant in tokens and what we've done is we've built the legal infrastructure uh for the uh for the web 3 world on ensuring that token tokens are distributed fairly and um what we're doing is really bridging this you know everchanging onchain reality with the offchain world of tax and compliance right you know payroll taxes um you know labor laws have been around

for thousands of years they're not going anywhere governments can't accept crypto payments um just yet maybe one day um and that's really what Tok is there is to bridge that Gap and so what we do is we we do locally compliant contract templates uh taxable event tracking payroll integration uh meaning who do I pay who do I pay taxes to when do I pay them to do I and you know what amount of taxes should I pay on this token distribution as well and then lastly we have the automated token distribution right making sure that at the end of the day the tokens are sent to the recipients wallets and that that amount is correct so wrapping up um hopefully some of these topics resonated with you um you

know we'll be here in Berlin all week so feel free to reach out um you know as a self-proclaim proclaimed crypto tax nerd uh we deal with kind of the whole end of the spectrum some some of your more um basic applications to some things more complex like you know for example one partner we're working with is like an nft based grant structure right where instead of giving an underlying token you're now giving an nft right and like thinking through all of those considerations like okay what is a fair market value how do you determine that when do you distribute and making sure that that's also aligned with um any sort of tax optimization that you can do in that specific country um so in any case thanks again for for joining me hopefully everyone learned here and everyone learned a little bit of

something if you weren't too familiar with it um I'll be in Berlin all week feel free to reach out um to me to myself um would love to have a coffee would love to meet everyone um but yeah that's it thanks and thanks again for being here thanks are there any questions hi um are there rules in place already if you get paid in a continuous stream like with super fluid so that's that's kind of what I was getting at with the on train versus offchain vesting um it it really depends so right now the issue with that is you

know right now the FMV of the tokens and again I'm speaking generally here right um is determined as when that token actually hits your wallet right and so when you have fractional amounts of tokens that are continuously hitting your wallet obviously you're not going to Value every single second of the day to come up with some sort of um you know FMV that you then should be taxed on right and so from there you got to you know take a you know what we do is we take like a country approach of like okay um you know what's like an a reasonable you know kind of what's like an a reasonable amount of time that we can agree on here to where we can settle an FMV and make sure that we use that as the basis for whatever tax withholding right so that's kind of one aspect the

other aspect is is that um you know you need to kind of break like timing perspective since you're constantly getting tokens there needs to be some sort of like cutof date of like all right well you know I'll take the start in the and calculate the taxes on that based upon some of this this preconceived notion and then you know use that as the basis right um but there isn't like uh any like explicit rules that we've seen that say oh yeah you know this is the convention that you use so a lot of it and this is kind of like what's new right and this is the you know exciting part of my job where we can go out and and figure out how to come up with these Solutions but good good question anyone else

thanks um can you do kind of multi-jurisdictional uh relationship so countries in you know sorry company in the US who Shing the tokens and then to people in Europe Asia wherever else yeah so and again this part of like the difficulty of all of this is you know you're globally distributed teams here and so you know when you have these Arrangements right the the first thing that's really important is understanding what the employment and legal structure is right um are you dealing with contractors are you dealing with employees um a lot of the times we see employees um employed via various employer records right which obviously adds like a whole other middlemen to

this entire process that you need to be able to integrate with and work with um but yeah we see we see that all the time a lot of time you see have swiss foundations that are then Distributing the tokens um us companies um but yeah so it's you know ultimately taxes are kind of set where the end recipient is um but again generally speaking you know high low obviously each each individual situation is different but yeah like we we we see that all the time and it really comes down to like what is the legal setup are you dealing with employees contractors Etc and um you know going from there and figuring out like what the obligations are and and when so another question then who's your client right cuz presumably the employer

will bring you in but if the beneficiary is ultimately the uh the employee or the contractor who I mean who who ultimately are you liable to well so technically the employee is Li the employer right because there's employer withholding obligations right if you know if I get paid a salary in in Germany my employer needs to deduct taxes from my paycheck and pay the you know various tax tax Authorities on my behalf right and so typically the employer is is the client in this case because they're the ones with the obligation to pay those taxes but as an employee if you know if I've got tokens

at vest in three years time like I live in Switzerland I don't need to Value those until I've received them and I've got them as an asset at the end of the calendar year so that ultimately is my liability to pay and not not the organization giving me the tokens right it's so it's like it's you know it depends on what your structure is so like in Switzerland though you also have like the I think it's the OS oasi right all these Social Security payments that you need to make as well um which employers are required to withhold from any any payments you know Switzerland's a little different example because there's tax at source right which may apply to you depending on what permit you have um but again this is like part of why like all right we understand the employment scenario try to figure

everything out where is everyone located and then you can come up with um a a flow that works for those SC you're creating a scheme for the employer basically exactly exactly brilliant thank you more questions I think one back one back there in terms of simplifying potentially um uh off ramps or streamlining um could you speak maybe towards uh gex Global Employment companies or maybe um bridg bridging out toward uh CD BCS on the horizon and whether cbcs potentially with composability may may help some of these problems yeah that's that's definitely

definitely an interesting question um you know I think the whole cbdc landscape is it's you know it's probably going to if if they ever do come right which we know they are in a few countries like it's going to totally change this this entire flow right and it's something that we're thinking about of like okay understanding that well you know I said before governments don't accept you know crypto to pay for taxes not yet but maybe they will right and then thinking about okay how does that change this entire flow from employer to from employer payment of employee withholdings right and and so yeah it's a good question something we were thinking about um hard to say right um you know some sort of Global Employment

company is also you know an interesting idea that that we've we've started to think about like would that work especially if you know if you're part of a dow right because that would simplify you know tax withholding obligations would also allow full-time employment um which is important in countries like the US where you have benefits that are contingent upon employment right and so yeah all interesting questions um you know I don't know if I have an if I have an answer I can probably tell you what I think but um you know we we'll see more questions uh right now it looks like your clients are mostly crypto project with employees or contract workers but um can your software or Solutions be

used by other companies that help individual Freelancers got it um yeah so our kind of our sweet spot is really like like you said on the employment and and contractor side um you know the stuff is complex so like we we you know we're thinking about a potential self-service solution but a lot of the times you you end up needing to bring like a lawyer in anyways or some sort of like hrx or payroll expert in that country which we all have in house anyways so it's like you know we we haven't really seen the need to be able to have like the self-service solution just yet just because it is complex and like you know like we just talked about with the Switzerland example right it's um you know it's totally dependent on what your

setup is um you know never say never right I think I think it's something that's interesting um but right now it's um you know very much something that you know we we want to be a part of because you know it's like I I said other we don't want you guys to like set something up and then all of a sudden have to go out to law firms and pay tens of thousands of dollars to do you know research that we already have in house right um two more questions do you help with tax reporting and accounting yeah so we so in terms of like when we run like a payroll process um that all kind of gets calculated in house by our tax engine and then what we'll do from there is then pres you know export into VAR accounting formats

and then that then ultimately can get uploaded into um you know various Erp Erp functions as well my last question is about which country or legislation is the best to reduce taxes uh not tax advice but um I'm sure sure a quick Google search might might might give you a few answers um but you know if if I could answer I would but hasht hashtag not not tax advice none of this one last uh have you seen any governments

step up to the table like how come the US government isn't creating tax man Dow and that we can just go to directly and like where are they in the Builder space Have You Been reached out in that sort of sense yeah so not not directly but like what we have seen and tax mandal by the way is tremendous name for for any any any tax Authority you know so you know I'll keep that one in the back of my head um but yeah I mean I think the whole CB cbdc question is also kind of key into is also into that right because in theory if the government knows exactly what you're making they can Al ta calculate the taxes for you

and withhold it right um but you know you could probably argue that like if they know it anyways they could you know they could have done that with in the web 2 world as well if like your employer just says here's like says says to the government here's the salary here's what to withhold um but in any case so like it's an interesting concept to be honest like I don't know if we're going to be there anytime soon right I think governments are still like trying to figure out how to tax tokens in general right let alone you know taking steps to be that intermed intermediary right to kind of facilitate all of this um so I think we're still a ways away from that but you know another kind of interesting interesting consideration

potential you know 15 years time you know where we where we might be awesome thank thanks everyone thank you