Restricted Token Units 101: All you need to know about RTUs, and how they affect your taxes.

Restricted Token Units (RTS) are one of the many different award structures that crypto companies and protocols use to grant tokens to employees with a vesting schedule. This blog post serves as an overview of Restricted Token Units and their tax implications for the recipients.

This article is provided for informational purposes only and is not intended to be construed as legal, financial, or tax advice. Readers should not rely solely on the information presented herein and should consult with their own legal, financial, or tax professionals regarding their specific situations. The author(s) and publisher make no representations or warranties concerning the accuracy or completeness of the information contained in this article. Reliance on any information provided in this article is solely at your own risk.

RTUs: An overview

Restricted Token Units (RTUs) are a type of award that grants the recipient token units with an associated vesting schedule - meaning they are conferred over time. 

Once RTUs are vested, the company will deliver the corresponding tokens to the recipient in a process known as settlement. The settlement can take place by the company directly transferring the tokens to the recipient’s wallet, or making the tokens available to claim via an escrow or vesting contract (see our recent blog post for more information). 

The recipient is typically taxed on the fair market value of the vested tokens at the time of settlement as ordinary income. The tokens units vest, sometime thereafter they are settled for tokens (tokens are delivered to the recipient), and it is at that time that the income is recognized. For this reason, it’s important for the recipients to know the fair market value of the tokens at the exact time of settlement. Settlement can occur any time after vesting (commonly within a quarter of vesting), though for tax and legal reasons settlement typically needs to happen before March 15 of the year following the vesting date. 

RTUs are different from Restricted Token Awards– which directly grant the tokens themselves (as opposed to token units) with a vesting schedule. To clarify: With Restricted Tokens, the rights to the tokens themselves vest, whereas Restricted Token Units involve vesting units that the company can, once vested, settle for actual tokens.

In the case of RTAs, tokens are immediately taxed at the time of vesting (unless an 83b election is made, in which no taxes are owed at vesting, a situation we covered in a previous post). RTAs will be detailed in an upcoming blog post.

Do the tokens need to exist to issue RTUs?

Typically, RTUs are issued when a token has already been minted. For tokens that are un-minted, some lawyers will instead issue Future token Interests (FTIs), which is a structure that will be covered in a separate post. 

Vesting and unlock schedules

RTUs are typically associated with a time-based vesting schedule(starting from the date of employment or award grant). The underlying tokens may also be governed by a separate unlock schedule (starting from the TGE date). In such cases, the company will typically wait until the RTUs are vested and the tokens are unlocked to deliver the tokens to the recipient. You read more on our blog post on vesting vs unlock schedules here.

What counts as delivery or settlement?

This question is important, as the settlement date determines when the income is recognized from a tax perspective. 

Some projects will directly transfer tokens to recipients. In this case, the tokens are typically considered settled at the time they are sent to the stakeholder.

If tokens are made available via a claim portal or vesting/unlock contract, they usually become available to claim at the recipient’s discretion after they vest and/or unlock. While some individuals may delay claiming tokens for tax reasons because they think that the tokens are not considered delivered or settled until they are claimed, some conservative accountants may advise clients that income is recognized at the time tokens become available to claim by the recipient. Please consult a legal, tax, or accounting specialist on such matters.

Settlement can occur at the time of vesting or sometime thereafter at the company’s discretion. It is common for companies to settle within a few days or weeks of the vesting date; especially if there are employees vesting on different dates, settlement may be batched monthly or quarterly.

In order to avoid tax penalties, RTUs usually must be settled before March 15th of the following year after the vest date.

Tax implications for recipients

There is no tax owed when RTUs are granted, or when they vest. 

Taxes are owed when RTUs are settled/delivered, at which point they are taxed as ordinary income at the time of settlement based on the fair market value (FMV) of the tokens on the settlement date. This is why it’s important for recipients to know the fair market value of tokens at the exact time of settlement.

This FMV becomes the new cost basis for later sales; if tokens are subsequently sold, the seller may recognize short-term or long-term capital gains (or losses) depending on how long they held the tokens after the settlement date based on the value at the time of sale minus the value at settlement. 

As an example:

Example RTU Schedule
Example RTU Schedule

Tax Withholding

Companies that issue token-based awards to employees have to comply with payroll tax obligations in addition to federal and state income tax withholdings at supplemental withholding rates. Federal supplemental withholding rates are currently at 22% for <$1M of awards in one year and 37% for >$1M, and companies have an obligation to withhold this value from employees to submit payments to the tax authorities. 

Companies typically choose one of several options when it comes to withholding. Using 22% as an example supplemental withholding rate, the company may:

  1. Withhold 22% of the tokens from the employee, delivering only 78% of the tokens to the employee. The company can then sell the withheld tokens or pay the tax authorities using cash from their balance sheet; or
  2. Withhold the 22% of the value of the tokens from the employee’s cash compensation.

We’ve also seen companies deliver the full tokens, pay the withholding on behalf of the employees, and enter into an employee receivable agreement for the employee to repay the company for that value. 

Of note, withholding amounts may often fall well short of the employee’s entire tax liability. (e.g., though the company withholds 22%, the employee may have a federal tax rate of 37% and still owe substantially more- not to mention additional state or local taxes).

How is the Fair Market Value (FMV) of tokens determined?

If the token is actively traded and sufficiently liquid, the FMV will likely be calculated based on the token’s trading price on major exchanges. Some companies will use a spot price at the time of settlement or calculate the FMV as a time-weighted trailing average over 1 - 30 days.

Otherwise, companies may commission a token valuation report to determine the Fair Market Value of each token. The token valuation may consider liquidity, circulating supply, lockup schedules, transfer restrictions, token sales, secondary transactions, comparable valuations, among other factors when determining the Fair Market Value. Valuation reports are typically commissioned for tokens that are not yet openly traded or only recently launched. 

Token valuation reports typically expire within a few weeks or months (depending on the firm), or upon a material event (such as a launch, listing, secondary sale, etc.). 

Founders should try to seek out firms that specialize in token valuations. Teknos and Redwood  are two widely-used firms for token valuation reports, and we’re happy to facilitate introductions to either.

Double Trigger Vesting

Some companies may structure RTUs with a double-trigger vest, where two conditions need to be met in order for the RTUs to vest. Typically, the two conditions are

  1. A service-based trigger (time-based vesting, usually from the first day of employment); and
  2. A performance trigger (could be defined as when the token starts trading, or once it hits a particular liquidity threshold like, say, an average volume of 10% of circulating supply over 30 days).

In these cases, while someone might have fully met the service component (e.g. worked at a company for four years), their tokens may not vest until the liquidity trigger is met. 

Why do companies use double trigger vesting? 

Taxes are owed at the time of settlement and delivery of the tokens. If the tokens are not liquid enough to be sold to cover the tax bill at the time of settlement, the recipient may need to cover the tax cost out-of-pocket; companies may not want to put their employees in that situation. To prevent it, companies may add a second liquidity trigger to the vesting to ensure that 

  1. Employees will be able to sell to be able to cover their tax bill; but also
  2. The market for the token is liquid enough to not be severely impacted by employee sell pressure. 

The second trigger must happen within a predetermined window and there must be a significant risk that, at the time the award was made, the liquidity trigger might not happen. [Baker McKenzie].

The Braintrust Future Token Interest serves as a good example of a second trigger, where token interests are not considered vested until all of these conditions are true: TGE has occurred, mainnet is live, tokens achieve a market cap >$220M, and 24-hour volume on major exchanges > 17% of market cap.


In summary, Restricted Token Units (RTUs) are an integral and complex element of compensation frequently used in Web3 - merging traditional equity compensation principles with the distinctive attributes of digital currencies. It is imperative for leaders and legal professionals in the crypto industry to have a complete understanding of how they work, as well as the tax implications involved. For RTUs, having an accurate valuation of tokens at the time of settlement is crucial to meet and plan around tax obligations. While we trust that this overview serves as a helpful resource, we also emphasize the importance of consulting your own tax and legal experts for tailored advice.

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