➡️At Point of Entry

Tax position for lender/staker where CAPITAL REWARDS received and there is a transfer of beneficial ownership

The tax position of the principal tokens locked away needs to be considered at the time of entering the yield generating activity when:

o Lending out your cryptoassets

o Staking your cryptoassets

o Adding your cryptoassets to a liquidity pool

o Depositing cryptoassets as collateral for a loan you take out

The tax treatment depends on whether or not beneficial ownership of the tokens locked away has been transferred to another party. This is a very complex decision and please see our further guidance on this, but ultimately seek expert help from a tax professional or legal advice on this matter.

Principal tokens locked away

CGT disposal - principal tokens locked away

Known or ascertainable principal assumed: It is assumed that upon entry it is known or ascertainable how many principal tokens locked away are to be returned upon exit. The future market value of those tokens upon exit does not need to be known or ascertainable at the point of entry; as they are taxed on the entrance market value.

In the unlikely situation that the number of principal tokens to be returned upon exit are unknown or unascertainable at the point of entry, the tax treatment for the principal is the same as set out for a capital reward below.

If there is a transfer of beneficial ownership of your cryptoassets to another party/platform/protocol, the new HMRC guidance at CRYPTO61620 concludes this is a disposal of those cryptoassets (your loaned principal/staked principal/collateral provided) for capital gains tax purposes, upon entering the yield generating activity.

The disposal proceeds are the sterling market value upon entry of the principal tokens locked away. The acquisition cost of the principal tokens are deducted from the disposal proceeds. The acquisition cost is taken from the S104 pool (ie average cost of prior acquisitions), unless there is an acquisition of the same type of tokens within the 30 days following entering the yield generating activity. See more guidance here on how the costs are matched.

Where the market value of the tokens entering the activity is more than the ‘matched’ acquisition cost, there is a taxable capital gain upon entry. Where the value is less than the acquisition cost, there is a capital loss upon entry.

Tip:

This new guidance presents an opportunity for loss harvesting.

Where beneficial ownership is transferred upon entering into a yield generating activity, this triggers a capital gains tax disposal of your cryptoassets.

If at the time of entry, the tokens are worth less than their capital gains tax acquisition cost (ensuring you navigate the complex matching and bed and breakfast rules), a capital loss is realised.

This capital loss will reduce capital gains in the same tax year, or will be carried forward against future capital gains if not used.

CGT acquisition - redemption/claim tokens or a ‘right to receive future quantity of tokens’

At the point of entry, in exchange for disposing of the cryptoasset tokens locked away, there is also an acquisition of either:

o redemption/claim tokens – often the case for staking/liquidity pools; OR

o a ‘right to receive future quantity of tokens’

Regardless of which of the two is received, the tax position is the same, because in both cases you know the quantity of tokens you will receive upon exiting the yield generating activity.

The acquisition cost of the redemption tokens received or the ‘right to receive future quantity of tokens’ you are treated as receiving is the sterling market value of the principal tokens locked away (valued at the date of entry).

This market value of the tokens locked away at the date of entry of the activity is same figure as the disposal proceeds used in the capital gains calculation for the disposal of the principal tokens locked away.

Where upon entering the yield generating activity, the tokens are worth significantly more than their acquisition cost, this will realise a significant capital gains tax liability, which may need to be paid to HMRC whilst your cryptoassets are still locked away.

Capital reward tokens

CGT disposal – estimated future capital reward tokens

If the reward tokens receivable for the yield generating activity are capital in nature, rather than income, the capital reward is subject to capital gains tax at the time of entering the yield generating activity. There is no income tax on capital rewards. See our further guidance on whether rewards are capital or income.

The amount of tokens to be received as a capital reward are not known or ascertainable at the time they are subjected to capital gains tax. The taxpayer is required to use their best estimate, at the point of entry, of the present sterling market value of future capital reward. See below, How do I work out the taxable capital reward upon entry?, for more guidance on this.

The capital gain realised upon entry is re-assessed upon receipt of the capital reward (usually upon exit), to account for any difference between the estimated value and the actual value of the reward received.

How do I work out the taxable capital reward upon entry?

Disposal proceeds included in capital gains calculation upon entry are the taxpayer’s best estimate of present sterling market value of the capital reward to be received in the future.

There is little guidance on how to estimate the present value of the future reward tokens. It is especially difficult to estimate, because the characteristics that are inherent in a capital return include an unascertainable and speculative element, which is possibly related to growth in value.

The Valuation Office Agency work with HMRC on valuations for tax purposes and they offer some guidance on such valuations at Section 8 of their Practice Note 3: “Chose in Action”. However this is not regarding cryptoassets, but in the context of land with planning permission.

CGT acquisition - ‘Marren v Ingles right' to captial reward tokens

If the reward tokens receivable for the yield generating activity are capital in nature, the estimate of the future capital reward is subject to capital gains tax at the time of entering the yield generating activity.

At the time of subjecting the capital reward to CGT (upon entry), there is an acquisition of a ‘Marren v Ingles right' to receive an unascertainable future quantity of capital reward tokens. The acquisition cost of this ‘Marren v Ingles right' is the estimated value of the future capital reward which has been used in the capital gains tax calculation upon entry.

There is a disposal of this ‘Marren v Ingles right' upon receipt of the reward (usually upon exit).

Combined CGT calculation – principal and reward tokens?

In the HMRC example 9 at CRYPTO61679, the estimated present value of the capital reward is added to the disposal proceeds for the disposal of the principal tokens locked away, in a combined capital gains tax calculation for the principal and the reward. The two disposals can either be combined, or there can be two separate capital gains calculations for the principal and the reward.

Since each disposal has a corresponding acquisition, with an acquisition cost equal to the disposal proceeds, it is likely to be more practical to have two separate calculations to facilitate the recording and tracking of the acquisition costs in crypto tax software.

Example

See our Example 1C illustrating the tax position at each point in the lifecycle of staking tokens where there is a transfer of beneficial ownership and capital rewards are received.