20 January 2025

Reverse Vesting in Team Token Allocations from a Swiss Tax Perspective

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  • Tax
  • Blockchain / Digital Assets
  • Taxes / Duties

Employee participation plans and team token allocations are a common concept to ensure that team members remain involved in the long-term success of a project. A “reverse vesting” model is often used for this. In Switzerland, this model has tax implications for both the issuing company and the recipients that need to be carefully analyzed.

  • Eric Sutter

    Senior Tax Advisor

Introduction

Employee participation plans and team token allocations are a common concept to ensure that team members remain involved in the long-term success of a project. A “reverse vesting” model is often used for this. In Switzerland, this model has tax implications for both the issuing company and the recipients that need to be carefully analyzed. This article explains how reverse vesting works and the tax consequences from a Swiss tax perspective.

What is reverse vesting?

Reverse vesting describes a mechanism in which tokens are allocated immediately and thus the power of disposal over the tokens is transferred to the recipient upon allocation, but in combination with a repurchase option of the company. Repurchase is possible for a certain period of time and reselling (i.e. transferability restriction) is therefore restricted during the term of the repurchase option. The repurchase option and the associated transferability restriction are released by means of a vesting schedule, which is often staggered over several years. Therefore, recipients such as founders, employees or contractors must remain in the company or provide certain services so that the repurchase option lapses.

In the event of early termination or non-fulfilment of the vesting conditions, the company can buy back the tokens that have not yet been vested. In practice, the tokens are repurchased at the initial purchase price of the token or at a pre-defined value.

Tax consequences for the issuing company

The following tax considerations arise for the issuing company:

Income tax consequences
The company must determine the fair market value (FMV) of the tokens at the time of allocation (i.e. at transfer of power of disposal). This value serves as the basis for the tax considerations. The following two transactions are to be assessed independently of each other:

  1. Issuance of the token: The difference between the purchase price for founders or employees and the FMV of the token can be recorded as an employee expense. In the case of contractors, the difference generally qualifies as compensation for services rendered.
  2. Optional Repurchase: If the token is repurchased, a reverse entry is made at the company.

The actual income tax consequences of the allocation of tokens to team members must be assessed on a case-by-case basis and depend on whether the company is an AG/GmbH or a foundation/association and whether the company is subject to ordinary taxation or can apply the so-called cost plus 5% taxation model.

VAT consequences
The VAT considerations of token allocations depends essentially on the category of the allocated token. In the case of a utility token in particular, it should be noted that allocation to beneficiaries domiciled in Switzerland may lead to a VAT liability for the issuing company. Similarly, services provided by contractors domiciled abroad and without their own Swiss VAT number result in VAT liabilities (acquisition tax) for the company domiciled in Switzerland, irrespective of the token qualification.

Tax consequences for the recipients

The recipients of the tokens, whether founders or employees, must consider the following aspects:

  1. Income tax
    Tokens that are not sold to founders and employees at FMV are treated as taxable income (i.e. as dividends or salary) in Switzerland to the extent of the difference between the purchase price and FMV as soon as they accrue economically to the recipient. In the case of a reverse vesting, this is generally the case at the time the token is acquired or allocated.

    However, the taxable value depends on whether tokens are immediately available (i.e. can be resold) or are subject to a transferability restriction. Transferability restrictions must be taken into account in the determination of the FMV.

    In the event of a resale of the token, it should be noted that the difference between the current FMV of the token and the resale price can be claimed by the recipient as acquisition costs in the individual tax return as “minus salary”.
  2. Wealth tax
    As soon as the tokens are in the recipient's power of disposal (generally upon allocation), they are subject to wealth tax. The valuation date (for individuals this is December 31) and the market value of the tokens are decisive here.
  3. Capital gains
    If the tokens are sold after the end of the reverse vesting period, any capital gains may be tax-free but losses cannot be deducted from the taxable income if the tokens were held as private assets. By contrast, gains in business assets are taxable and losses can be deducted from other incomes.

The above also applies to contractors who offer their services as individual persons, although no tax-free capital gain is possible on sale of tokens, as the tokens already qualify as business assets. For contractors who offer their services as legal entities, the usual Swiss GAAP accounting rules apply.

Conclusion
Reverse vesting is an effective way of ensuring the long-term commitment of team members.

The advantage of reverse vesting is that any difference between the FMV and the purchase price of the token is already taxed at the time of allocation, and not only when the vesting conditions are met.

The disadvantage is that the tax is due at the time of allocation and the tokens cannot be exchanged for fiat at that time. For the recipient, this means that they must be able to finance the tax liability from other income or savings.

A reverse vesting token allocation plan is not always preferable to a vesting token allocation plan. Therefore, a detailed analysis of the planned token allocation plan is highly recommended.


Questions about the vesting period, blocking period and cliff period? Please click on the following link (Tax Aspects of Team Token Allocation) to find our article on these topics.
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