Example 1C
Tax position for staker where CAPITAL REWARDS received and there is a transfer of beneficial ownership
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Tax position for staker where CAPITAL REWARDS received and there is a transfer of beneficial ownership
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See our other staking examples to show the different tax positions of this same scenario:
- income reward - transfer of beneficial ownership
- income reward - NO transfer of beneficial ownership
- capital reward - NO transfer of beneficial ownership
Bought 10 BTC for £100,000 in October 2020
Staked 10 BTC staked in March 2022 for indefinite period, when worth £30,000 per BTC
Staking reward of 5% pa receivable at the end of stake in BTC
10.5 BTC is received when stake ended in March 2023 when worth £20,000 per BTC (10 BTC principal and 0.5 BTC reward).
No other acquisitions or disposals of BTC (assume matching rules not relevant for simplicity)
Assumed that beneficial ownership is 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
No redemption tokens are received upon staking; therefore a ‘right to receive a future quantity of tokens’ is treated as received
Sold 10.5 BTC for £525,000 fiat sterling in March 2024
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 staking 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 stake the BTC 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; so this amount is included in the capital gains tax calculation with the disposal of the 10 BTC staked.
Capital gain of £207,500 (£300,000 plus £7,500 less £100,000) realised in the 21/22 tax year, upon staking the 10 BTC.
£41,500 CGT (£207,500 at 20%) is payable by 31 January 2023.
This is despite the fact that the £300,000 value subjected to CGT is locked away and no proceeds have actually been received. If the 10 BTC will still be locked away in January 2023, alternative funding will be needed to pay the CGT to HMRC. Furthermore, 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 staking term is indefinite and the reward can only be received upon exit).
There are two CGT acquisitions upon entry:
a ‘right to receive a future quantity of tokens’ – a right to repayment of the 10 BTC staked The acquisition cost of this right is £300,000. When the stake is ended, this right will be disposed of in exchange for a repayment of the principal 10 BTC staked.
a ‘Marren v Ingles right' to capital reward The acquisition of the right to receive an unascertainable future quantity of capital reward tokens’ – a right to receive the 0.25 BTC (however we do not know it is 0.25 until the stake is ended) The acquisition cost of this ‘Marren v Ingles right' is £7,500. When the stake is ended, 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).
There is a capital loss of £100,000 in the 22/23 tax year, upon un-staking the 10 BTC. The disposal proceeds are £200,000, but the acquisition cost upon entry was £300,000.
The stake was for a year, rather than the estimated 6 months, therefore 0.5 BTC was received as a reward, rather than the 0.25 BTC which was estimated and subjected to CGT upon entering the stake. 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 reward (disposal proceeds of £10,000 less the acquisition cost of £7,500). £7,500 of the reward is taxed in 21/22 when the BTC was staked and the balance of £2,500 is taxed in 22/23 when the stake was ended.
There is a net capital loss of £97,500 in 22/23 (£100,000 loss on the principal and £2,500 gain on the reward). The net loss of £97,500 cannot be carried back to reduce the £207,500 capital gain realised on entry in 21/22. Therefore the £41,500 CGT remains payable by 31 January 2023, even though the value of the BTC has dropped significantly in value. The £97,500 loss can only be set against capital gains in 22/23 and future years.
The 10 BTC re-acquired at the end of the stake has a CGT acquisition cost of £200,000. The 0.5 BTC received as a reward has an acquisition cost of £10,000. Accordingly, 10.5 BTC with acquisition cost of £210,000 is added to the S104 pool for BTC.
Capital gain of £315,000 (£525,000 less value when un-staked of £210,000) in the 23/24 tax year.
The capital loss of £97,500 realised on exit in 22/23 was not used and was carried forwards to 23/24. Therefore the net capital gain in 23/24 is £217,500.
CGT of £43,500 (£217,500 at 20%) to pay for 23/24, due for payment to HMRC by 31 January 2025. This is in addition to the £41,500 paid on the £207,500 capital gain in 21/22.
In total £85,000 CGT is paid on the 10.5 BTC on a total capital gain of £425,000. No extra CGT has been payable as a result of the new HMRC guidance triggering a disposal upon entry and exit of the staking. It has just accelerated the payment of half of that CGT to the point of entering the staking activity, rather than it all being payable in 23/24 when cashed out for fiat.