As blockchain startups and Web3 companies grow, many are exploring compensation models that include cryptocurrency or native tokens. Paying employees or contractors in tokens might seem like a natural fit—but without the right legal framework, it can open the door to serious regulatory, tax, and compliance risks.

This blog breaks down what every founder, HR executive, and employee should know before issuing or accepting crypto-based compensation.

🚀 Why Pay in Tokens?

Startups often offer tokens as part of incentive packages when cash flow is tight or to align team members with the long-term success of the project. But “token compensation” isn’t as simple as sending coins to a wallet address—it triggers securities law, employment law, and IRS considerations.

📄 Key Legal Considerations for Paying in Tokens

1. Is the Token a Security?

Under the SEC’s Howey Test, many tokens may be classified as securities—especially those with utility tied to a platform that’s not fully operational. If your token qualifies as a security, it must be registered or exempt, and subject to disclosure rules.

Assess whether your token is a utility or security. This classification impacts everything from vesting to tax treatment.

2. Vesting and Equity-Like Structures

Tokens can function like equity but require careful vesting agreements to avoid premature tax events or securities violations.

✅ Tip: Use token grants with clear vesting schedules (e.g., 4 years with a 1-year cliff). Token-based agreements should include forfeiture clauses, lockups, and performance milestones.

3. Taxation: Income or Capital Gains?

Tokens are treated as property by the IRS. This means compensation in tokens is considered ordinary income at the time of receipt, based on fair market value—and it must be reported and taxed accordingly.

✅ Tip: Employers must issue Form W-2 for employees or Form 1099 for contractors receiving tokens. Valuation must be clear and auditable.

4. International Contractors and Jurisdictional Issues

Crypto’s global nature makes token payments attractive—but local labor and tax laws still apply. Many countries view crypto income differently, so you must align with cross-border compliance rules.

✅ Tip: Consult local counsel or a law firm with international crypto experience when paying non-U.S. contributors.

How I Can Help

Draft custom employment agreements that address:

• Token compensation terms

• Vesting and forfeiture schedules

• Securities law compliance

• Tax and reporting obligations

• IP ownership and confidentiality

Shperun Law also advises on tokenomics, whitepapers, and DAO employment models.