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Recap HomeCrypto Tax Guide (Lite)HMRC Cryptoassets Manual
  • A Technical Guide to Cryptocurrency Tax for UK Individuals
    • What are Cryptoassets?
    • Who are Recap?
  • CRYPTOCURRENCY TAX
    • Do I Need to Pay Tax on my Cryptoassets?
    • Which Taxes Apply?
      • Capital Gains Tax (CGT)
      • Income tax
      • VAT
      • Inheritance tax
      • Stamp Duty
    • How Much Tax Will I Pay?
    • New HMRC DeFi Guidance
      • Overview of HMRC guidance
      • 1️⃣Is the Reward Income or Capital?
      • 2️⃣Is Beneficial Ownership (BO) transferred?
      • 3️⃣Consider the Tax Treatment
        • Staker/Lender/Collateral Provider
          • Income Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1A
              • Example 2A
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1B
              • Example 2B
          • Capital Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1C
              • Example 2C
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1D
              • Example 2D
        • Borrower
    • Investor or Trader?
      • Badges of Trade Limitations
      • HMRC Approach
      • Court Cases involving Financial Traders
    • Capital Gains Tax
      • Calculating the Capital Gains Position
      • Disposal proceeds
      • Disposals to Connected Parties
      • Allowable costs for CGT
        • Exchange fees
        • Forks - affect on allowable costs
      • Capital Loss Claims
    • Income Tax
      • Financial trading income
      • Miscellaneous Income
      • Employment income
    • Fair Market Valuation
  • TRANSACTION TYPES
    • 💷Selling Crypto for Fiat
    • 🔄Trading Crypto to Crypto
    • 🛍️Purchases using Crypto
    • 🎁Gifts
    • 💍Spouse Transfers
    • 🎗️Gifts to Charity, CASCs & Bodies for a National Purpose
    • 🎈Airdrops
    • 🤝Staking
    • 💸Transfers
    • 🍴Forks
    • ⛏️Mining
    • 👛Employment income
      • UK Employer
      • Overseas employer
      • National Minimum Wage (NMW)
    • 🚨Lost & Stolen Crypto
    • 🎲Gambling
    • 💧Liquidity Pools
      • Example - Liquidity pool
    • ⬆️Token Upgrades/Swaps
    • 🔮Cryptoasset derivatives (CFDs, Futures and Margin Trading)
    • 💼Crypto Loans
    • 🔄REPOS
    • 🪞Reflections Rewards
    • 👥Referral Income
    • 💳Cashback
    • 🎨NFTs (Non Fungible Tokens)
    • 🎮NFTs earned playing games
  • Record Keeping
  • Filing Your Self-Assessment
    • How to Register for Self-Assessment
    • How to Fill In the Tax Return
    • Submitting the Tax Return and Paying the Tax
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On this page
  • Collateralised Loan with NO beneficial ownership transfer
  • At point of entry
  • No CGT disposal - collateral added
  • CGT disposal - estimated capital reward
  • CGT acquisition - 'Marren v Ingles right' to capital reward
  • CGT acquisition - receipt of loan
  • At point of exit
  • No CGT disposal - collateral removed
  • CGT disposal – ‘Marren v Ingles right' to capital reward
  • CGT acquisition – capital reward
  • CGT disposal - repayment of loan
  • On sale of BTC for fiat
  • What if there was a liquidation of collateral instead?
  • No CGT disposal - USDC loan
  • CGT disposal - collateral locked away
  • CGT disposal – ‘Marren v Ingles right' to capital reward
  • Summary of tax position with liquidation

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  1. CRYPTOCURRENCY TAX
  2. New HMRC DeFi Guidance
  3. Consider the Tax Treatment
  4. Staker/Lender/Collateral Provider
  5. Capital Rewards
  6. BO not transferred

Example 2D

No transfer of beneficial ownership upon adding collateral, a capital reward and liquidation

PreviousExample 1DNextBorrower

Last updated 2 years ago

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Collateralised Loan with NO beneficial ownership transfer

See our other other examples to see the different tax positions of this same scenario:

  • - income reward - transfer of beneficial ownership

  • - income reward - NO transfer of beneficial ownership

  • - capital reward - transfer of beneficial ownership

  • Bought 10 BTC for £100,000 in October 2020

  • Provided collateral of 10 BTC in March 2022 for indefinite period, when worth £30,000 per BTC

  • Borrowed 105,000 USDC in March 2022, when tokens worth £75,000

  • Reward of 5% pa receivable in BTC when the collateral is withdrawn

  • 10.5 BTC is received when collateral is withdrawn in March 2023 (10 collateral and 0.5 capital reward), when worth £20,000 per BTC and 105,000 USDC loan repaid at same date when worth £77,000..

  • Lending charges of 5,500 USDC paid upon repayment of loan (5% pa) – worth £3,850 (5,500 UDSC purchased on same day).

  • No other acquisitions or disposals of BTC (assume matching rules not relevant for simplicity)

  • Assumed that beneficial ownership is NOT transferred upon entry

  • The CGT (capital gains tax) free annual exemption is already used and the CGT rate is 20%, as income is more than £50,270

  • Redemption tokens are received upon providing the collateral

  • Sold 10.5 BTC for £525,000 fiat sterling in March 2024

At point of entry

No CGT disposal - collateral added

There is no CGT disposal of the collateral upon locking it away.

For tax purposes any acquisition of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

CGT disposal - estimated capital reward

It is necessary to estimate the present sterling value of the BTC capital reward. Although it is a set return of 5% pa; because the term of providing collateral is open-ended, the number of BTC to be received in the future as the reward is not known and is not ascertainable.

The taxpayer intends to only lock away the collateral for 6 months, so they decide to estimate the reward to be 0.25 BTC. The current sterling value of 0.25 BTC is £7,500.

Although there is no HMRC guidance on this point, it is likely this should to be treated as a part-disposal of the 10 BTC added as collateral. Therefore in the capital gains tax calculation for the capital reward, the proceeds in the capital gains tax calculation will be £7,500 and a proportion of the acquisition cost of the 10 BTC will be deducted based on the standard part-disposal formula:

A / (A + B)

A = the disposal proceeds of £7,500

B = the market value of the 10 BTC retained of £300,000.

Therefore 2.4% of the £100,000 acquisition cost can be deducted from the £7,500 disposal proceeds. In this example, the capital gain would be £5,061 (£7,500 less £2,439).

Capital gain of £5,061 realised in the 21/22 tax year, upon adding 10 BTC collateral in return for a capital reward.

£1,012 CGT (£5,061 at 20%) is payable by 31 January 2023.

The £7,500 estimate of the capital reward has been subject to tax at which point there is no idea when the reward will be received (since the collateral term is indefinite and the reward can only be received upon exit).

The acquisition cost of the 10 BTC in the S104 pool has been reduced by £2,439 to £97,561.

CGT acquisition - 'Marren v Ingles right' to capital reward

Upon adding the collateral, a ‘Marren v Ingles right' to receive an unascertainable future quantity of capital reward tokens’ is received. This is a right to receive the estimated 0.25 BTC capital reward (however we do not know it is 0.25 until the collateral is withdrawn).

The acquisition cost of this ‘Marren v Ingles right' is £7,500. When the collateral is withdrawn, this right will be disposed of in exchange for the receipt of the capital reward tokens (which we know with the benefit of hindsight will be 0.5 BTC).

CGT acquisition - receipt of loan

The receipt of the loan could be in fiat (ie GBP/USD/EUR) or cryptoasset tokens. In this example 105,000 USDC tokens are received, which are worth £75,000 at the date of receipt.

The CGT acquisition cost of the 105,000 USDC tokens received as a loan is £75,000.

At point of exit

No CGT disposal - collateral removed

The disposal of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

CGT disposal – ‘Marren v Ingles right' to capital reward

The collateral was locked away for a year, rather than the estimated 6 months, therefore 0.5 BTC was received as a capital reward upon exit, rather than the 0.25 BTC which was estimated and subjected to CGT upon adding the collateral upon entry. The market value of the 0.5 BTC received in March 2023 is £10,000.

There is a further capital gain of £2,500 upon receipt of the capital reward (disposal proceeds of £10,000 less the acquisition cost of £7,500), with CGT of £500 payable by 31 January 2024.

£5,061 of the reward is taxed at 20% in 21/22 when the BTC was added as collateral and the balance of £2,500 is taxed at 20% in 22/23 when the reward was received (at the time the collateral was withdrawn).

CGT acquisition – capital reward

The 0.5 BTC received as a capital reward has an acquisition cost of £10,000. Accordingly, 0.5 BTC with acquisition cost of £10,000 is added to the S104 pool for BTC.

CGT disposal - repayment of loan

When the loan of 105,000 USDC is repaid, this is treated as a disposal of the USDC for CGT purposes. The disposal proceeds are £77,000 (the market value at the date of repayment and the acquisition cost is £75,000 (assuming for simplicity that the acquisition cost upon entry is matched to this disposal). Therefore, there is a capital gain of £2,000 on the increase in value throughout the term of the loan.

There is no tax relief for the £3,850 worth of lending fees paid upon repayment (5,500 USDC). However, using 5,500 USDC to pay the lending charges, is a CGT disposal of the 5,500 USDC. The disposal proceeds are £3,850, but the acquisition cost is also £3,850 as the USDC was purchased on the date of the loan repayment. Therefore there is no capital gain or loss on the payment of charges.

On sale of BTC for fiat

Capital gain of £417,439 (£525,000 less original acquisition cost of £107,561) in the 23/24 tax year. The acquisition cost of the 10.5 BTC in the S104 pool was £107,561 (£100,000 less £2,439 plus £10,000).

CGT of £83,488 (£417,439 at 20%) to pay for 23/24, due for payment to HMRC by 31 January 2025.

In total £85,000 CGT is paid on the 10.5 BTC on a total capital gain of £425,000. However, cashflow is improved significantly because there is no transfer of beneficial ownership, as only the estimated capital reward suffered CGT upon adding the collateral and receiving the reward.

What if there was a liquidation of collateral instead?

No CGT disposal - USDC loan

If the collateral had been liquidated in March 2023, rather than being withdrawn, the 105,000 USDC loan is retained (so there is no disposal of the 105,000 USDC for CGT purposes upon liquidation).

CGT disposal - collateral locked away

As the 10 BTC which has been liquidated was not already disposed of for CGT purposes upon adding the collateral, there is now a CGT disposal of the 10 BTC upon liquidation.

Following the HMRC guidance, there is a capital gain of £100,000 in 22/23 upon liquidation, with CGT of £20,000 payable by 31 January 2024.

You are treated as selling the 10 BTC for £200,000, even though all you received nothing in return for giving up the collateral upon liquidation. The 105,000 USDC loan has been retained upon liquidation, but this should not be viewed as consideration for the collateral given up; because the loan is treated as acquired for and sold at market value for tax purposes, with the effect that you are only subject to CGT on the appreciation or depreciation in value for the period that the loan is in your possession.

If the HMRC guidance is not followed and alternatively the disposal proceeds upon liquidation in this situation are recorded as Nil (not market value as per the HMRC guidance), it realises a capital loss of £100,000, which is a true reflection of the loss by the taxpayer and seems to more fairly reflect the position.

It is recommended you seek professional tax advice regarding this matter, especially if you are considering taking a position that is not in agreement with HMRC's guidance.

CGT disposal – ‘Marren v Ingles right' to capital reward

Let's say for example that upon liquidation no capital reward tokens are received and will never be received.

There is a disposal of the 'Marren v Ingles right' for Nil disposal proceeds, which realises a capital loss of £7,500 in 22/23.

Summary of tax position with liquidation

  • Adding collateral - no capital gains tax event

  • Estimated capital reward - capital gain of £5,061 in 21/22 - £1,012 CGT payable 31/1/2023

  • Liquidation - principal tokens:

    • Following HMRC guidance: Capital gain of £100,000 in 22/23 - £20,000 CGT payable by 31 January 2024. The gain arises as the market value at liquidation was £200,000 and this is notionally treated as the disposal proceeds and the original cost of £100,000 is deducted to arrive at a gain of £100,000

    • Possible alternative approach:

      Capital loss of £100,000 in 22/23 - £20,000 CGT reduction in 22/23 or future years (providing there are capital gains to offset). The £100,000 net capital loss is the cost of the original 10 BTC which was liquidated

  • Liquidation - capital reward – capital loss of £7,500 on capital reward in 22/23 - £1,500 CGT reduction in 22/23 or future years (providing there are capital gains to offset

According to the HMRC guidance at and the HMRC example at , the disposal proceeds of the 10 BTC should be recorded as £200,000 (the market value at the date of liquidation). The acquisition cost is the original £100,000 paid for the 10 BTC.

In and , where this is a transfer of beneficial ownership upon adding the collateral, there is an overall loss on liquidation of £100,000. This seems fair and logical, because the collateral which cost £100,000 has been given up for nothing in return.

When following the HMRC guidance, the gain of £100,000 in this example and in , where there is no transfer of beneficial ownership upon adding the collateral, is £200,000 more than in and . However nothing was received in exchange for the collateral in either example, and the £100,000 spent on the original purchase of the collateral is now lost in both cases. So it would seem logical that the overall tax position should be the same, regardless of whether or not beneficial ownership is transferred when the collateral is added.

3️⃣
Example 2A
Example 2B
Example 2C
CRYPTO61640
CRYPTO61675
Example 2A
Example 2C
Example 2B
Example 2A
Example 2C