On the basis of HMRC's new guidance on DeFi staking and lending, it is expected that most staking and lending rewards will be treated as income rewards (taxed as miscellaneous income subject to income tax, where the activity does not amount to a financial trade).
See our further guidance on whether a staking/lending reward is considered as income or capital.
HMRC's Cryptoasset manual also indicates clearly mining income is also to be treated as miscellaneous income, where the activity does not amount to a financial trade.
It is expected that most other types of income derived from cryptoassets will be treated in a similar way to mining/staking and lending rewards for tax purposes (taxed as miscellaneous income subject to income tax, where the activity does not amount to a financial trade).
The guidance in this section regarding the tax treatment, allowable expenses and losses for miscellaneous income covers the following types of income:
The tax position regarding individuals trading and investing in derivatives over cryptoassets (ie Contract for Difference (CFD’s), Futures and Margin trading) is different to the tax position of an investor buying and selling cryptoassets.
HMRC refer individuals using derivatives to guidance in their Corporate Finance Manual, which is non-cryptoasset specific. Assuming the individual is not treated as a financial trader, the tax position is unclear.
Profits or losses arising from derivative will be either taxed under the capital gains regime or will be subject to income tax and treated as miscellaneous income.
Allowable expenses used in the income generating activity (such as such as additional electricity used in mining) can be deducted from the miscellaneous income.
From 2017/18 onwards, there is a ‘Trading Allowance’ of £1,000.
This is an automatic tax exemption that does not need to be claimed. Although it is called a ‘Trading Allowance’, it applies to both trading and miscellaneous income. Therefore, if the total trading and miscellaneous income for a tax year is less than £1,000 and the individual has no other self-employment, there is no tax to pay on this income and there is nothing to declare to HMRC.
However if you already file a Tax Return, it is recommended to declare the income and the use of the trading allowance, even where they net off to Nil taxable income.
If the Income is more than the Trading Allowance
If the trading and miscellaneous income is more than the £1,000 Trading Allowance, the individual can choose to simply deduct the £1,000 from their total income (with no deduction for expenses), or calculate the trading profit and net miscellaneous income under the normal rules (income less allowance expenses).
However, if the individual also has a separate self-employed business (e.g. a plumber), care needs to be taken. The Trading Allowance cannot be claimed against the cryptoasset trading or miscellaneous income if self-employed expenses are being deducted from any self-employed income.
The Trading Allowance cannot create a loss
For example, if the income is £600, you cannot deduct the £1,000 Trading Allowance and claim a loss of £400. In this example, the Trading Allowance is restricted to £600, so that a loss is not created.
Miscellaneous income subject to income tax
Where the activity does not amount to a financial trade, HMRC confirms that that the sterling value (at the time of receipt) of income derived from cryptoassets (ie mining, staking, lending rewards) will be taxable as miscellaneous income subject to income tax, with any allowable expenses reducing the amount chargeable to tax.
Loss on Miscellaneous Income
A loss under the miscellaneous income provisions can only be carried forwards to reduce future miscellaneous income from the same source.
Capital Gains on Subsequent Disposals
The receipt of cryptoasset tokens as income is an acquisition of those tokens for capital gains tax purposes.
The sterling market value at the date of receipt is the capital gains tax acquisition cost.
When these tokens received as income are later disposed of, there may be a capital gain or capital loss depending on the change in value since acquisition and the application of the share matching rules, dictating which cost is offset against a disposal.