⬅️At Point of Exit

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 exiting the yield generating activity when:

o Cryptoassets loaned out are repaid to you

o Cryptoassets are removed from a liquidity pool

o Cryptoassets provided as collateral are withdrawn

o Cryptoassets staked are returned at the end of the stake

Principal tokens locked away

CGT disposal - redemption/claim tokens or ‘right to receive tokens’ received on entry

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 was a capital gains tax disposal when your principal was locked away upon entry; at the time of entry you acquired either redemption/claim tokens or a ‘right to receive a future quantity of tokens’.

The acquisition cost of the redemption tokens or ‘right’ is the market value of the tokens locked away, at the time of entry.

Upon exit from the arrangement, there is disposal for capital gains tax purposes of this asset you received upon entry (either the redemption/claim tokens or the ‘right to receive future tokens’). The disposal proceeds used in the capital gains tax calculation is the sterling market value (at the date of exit) of the principal tokens repaid to you upon exit.

The matching rules dictate which acquisition costs are deducted from the disposal proceeds to calculate the capital gains. Subject to the matching rules, it is likely that where the value of the principal amount of tokens has increased in value whilst locked away, there will be a taxable capital gain upon exit.

Conversely, where the value has fallen there will be a capital loss on exit. Where the capital loss on exit is realised in a later tax year than that of entry, it cannot be carried back to reduce any earlier capital gain upon entry.

CGT acquisition – re-acquisition of principal tokens locked away upon entry

When the tokens locked away are repaid to you upon exiting the yield generating activity, they are treated as received at the sterling market value of the tokens at the date of exit.

Therefore, at the point of exit, you have been fully charged to capital gains tax on the current market value of the tokens. When the tokens are subsequently disposed of (let’s say sold for fiat for example), you will only pay further capital gains tax to the extent they appreciate in value between exit from the activity and eventual disposal.

Equally, if they fall in value by the time they are disposed of, a capital loss will be realised. Unless in the same tax year, a capital loss cannot be carried back to reduce any earlier capital gain realised upon entry or exit from the yield generating activity.

Capital reward tokens

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

When the capital reward tokens are received (usually this will be upon exit from the yield generating activity), a capital gains tax calculation is required to adjust for the difference between the estimated and actual market value of the capital reward tokens received.

At the time of entering the yield generating activity, the estimated future capital reward tokens were subjected to CGT. Upon entry, there was also an acquisition of ‘Marren v Ingles right' to receive an unascertainable future quantity of tokens. The acquisition cost of his ‘Marren v Ingles right' is the estimated value of the future reward which has been used in the capital gains tax calculation upon entry.

On receipt of the capital reward tokens, a further capital gains tax calculation is required. The disposal proceeds used in the calculation is the sterling market value of the capital reward tokens at the date of receipt. The acquisition cost is the estimate of the future capital reward, which was made upon entry. Where the estimate upon entry was too low, there will be a further capital gain upon receipt of the capital reward tokens. Where the estimate upon entry was too high, there will be a capital loss upon receipt of the capital reward.

Where the disposal of the ‘Marren v Ingles right’ gives rise to a capital loss, it may be possible to elect to set that loss against any capital gain that arose upon entry. For more information about this election HMRC point you to CG15080 onwards

HMRC Example 9 at CRYPTO61679 shows the capital gains computation where a loss is realised upon disposal of the 'Marren v Ingles right', at the time of receiving the reward tokens.

CGT acquisition – capital reward tokens

The acquisition cost of the capital reward tokens received is the sterling market value of the tokens at the date of receipt.

When the tokens are subsequently disposed of (let’s say sold for fiat for example), you will only pay further capital gains tax to the extent they appreciate in value between receiving the reward tokens and eventual disposal.

Equally, if they fall in value by the time they are disposed of, a capital loss will be realised. Unless in the same tax year, a capital loss cannot be carried back to reduce any earlier capital gain realised upon entry or exit from the yield generating activity.

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.