Example 2C
With transfer of beneficial ownership upon adding collateral, a capital reward and liquidation

See our other other examples to see the different tax positions of this same scenario:
  • Example 2A - income reward - transfer of beneficial ownership
  • Example 2B - income reward - NO transfer of beneficial ownership
  • Example 2D - capital reward - NO transfer of beneficial ownership
  • Bought 10 BTC for £100,000 in October 2020
  • Provided collateral of 10 BTC in March 2022 for an 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  • Reward of 5% pa receivable in BTC when the collateral is withdrawn
  • 10.5 BTC is received when collateral is withdrawn in March 2023 (10 collateral and 0.5 capital reward), when worth £20,000 per BTC and 105,000 USDC loan repaid at same date when worth £77,000.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 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

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 provide 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; so this amount is included in the capital gains tax calculation with the disposal of the 10 BTC collateral added.
Capital gain of £207,500 (£300,000 plus £7,500 less £100,000) realised in the 21/22 tax year, upon providing the 10 BTC collateral.
£41,500 CGT (£207,500 at 20%) is payable by 31 January 2023.
This CGT is payable despite the fact that the 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 collateral term is indefinite and the reward can only be received upon exit).

The CGT acquisition cost of the redemption tokens received when the collateral was added is £300,000. Upon removing the collateral, these redemption tokens will be disposed of in exchange for a repayment of the principal 10 BTC collateral provided.

Upon entry, there is the acquisition of a right to receive the estimated 0.25 BTC (however we do not know it is 0.25 until the collateral is withdrawn, it was just an estimate upon entry). 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).

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.

There is a capital loss of £100,000 in the 22/23 tax year, upon withdrawing the 10 BTC collateral. The disposal proceeds are £200,000, but the acquisition cost upon entry was £300,000. This capital loss of £100,000 in 22/23 cannot be carried back to reduce the £200,000 capital gain realised on entry in 21/22.
The £41,500 CGT on the principal and capital reward remains payable by 31 January 2023, even though the value of the BTC has dropped significantly in value. The £100,000 loss can only be set against capital gains in 22/23 and future years.

The collateral was provided for a year, rather than the estimated 6 months, therefore 0.5 BTC was received as a capital reward, rather than the 0.25 BTC which was estimated and subjected to CGT at the time of adding the collateral. The market value of the 0.5 BTC received in March 2023 is £10,000.
There is a therefore 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). So additional CGT of £500 is payable (£2,500 at 20%) for 22/23 by 31 January 2024.
£7,500 of the reward is taxed in 21/22, when the BTC was added as collateral, and the balance of £2,500 is taxed in 22/23 when the collateral was withdrawn.

There is a net capital loss of £97,500 in 22/23 (£2,500 gain on the capital reward less the £100,000 loss on the principal collateral). 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 removed from collateral has a CGT acquisition cost of £200,000. The 0.5 BTC received as a capital 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.

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.

Capital gain of £315,000 (£525,000 less value when collateral removed 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 when adding and removing collateral. It has just accelerated the payment of approx half of that CGT, to the point of adding the collateral, rather than it all being payable in 23/24 when cashed out for fiat.

  • Adding collateral - capital gain of £200,000 in 21/22 - £40,000 CGT payable 31/1/2023
  • Estimated capital reward - capital gain of £7,500 in 21/22 - £1,500 CGT payable 31/1/2023
  • Removing collateral - capital loss of £100,000 in 22/23 - £20,000 net CGT reduction of (providing there are capital gains to offset).
  • Receipt of capital reward - capital gain of £2,500 in 22/23 (no tax payable as gain eliminated by £100,000 loss in 22/23)
  • Sale for fiat - capital gain of £315,000 in 23/24 (less net loss of £97,500 from 22/23) - net gain - £217,500 - £43,500 CGT payable 31/1/2025
  • Overall CGT payable £85,000 (on overall gain £425,000)

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).

As the 10 BTC which has been liquidated was already disposed of for CGT purposes upon adding the collateral, there are no further tax consequences for the 10 BTC as they were transferred to the platform upon adding the collateral.

The redemption tokens are retained, but are now worthless as there is nothing in the collateral pot to be claimed. When the collateral was added, there was an acquisition of redemption tokens with an acquisition cost of £300,000.
Although there is no HMRC guidance on this point, it seem arguable that a negligible value claim can be made on the basis that the redemption tokens have become worthless upon liquidation. This realises a capital loss of £300,000 in 22/23. The disposal proceeds are Nil and the acquisition cost is £300,000.
This capital loss of £300,000 in 22/23 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 there has been a liquidation. The £300,000 loss can only be set against capital gains in 22/23 and future years.

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.

  • Adding collateral - capital gain of £200,000 in 21/22 - £40,000 CGT payable 31/1/2023
  • Estimated capital reward - capital gain of £7,500 in 21/22 - £1,500 CGT payable 31/1/2023
  • Liquidation – capital loss of £300,000 in 22/23 - £60,000 CGT reduction in 22/23 or future years (providing there are capital gains to offset)
  • Liquidation – 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)
  • Net capital loss of £100,000 – net CGT reduction of £20,000 (providing there are capital gains to offset). The £100,000 net capital loss is the cost of the original 10 BTC which was liquidated.
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On this page
Collateralised Loan with beneficial ownership transfer
At point of entry
CGT disposal – tokens provided as collateral and estimate of capital reward
CGT acquisition - redemption tokens received for collateral
CGT acquisition - ‘Marren v Ingles right' to capital reward
CGT acquisition - receipt of loan
At point of exit
CGT disposal - of redemption tokens
CGT disposal – ‘Marren v Ingles right' to capital reward
Overall capital gain/loss
CGT acquisition – re-acquisition of tokens provided as collateral and acquisition of capital reward tokens
CGT disposal - repayment of loan
On sale of BTC for fiat
Summary of tax position without liquidation
What if there was a liquidation of collateral instead?
No CGT disposal - USDC loan
No CGT disposal - collateral locked away
CGT loss claim - redemption tokens
CGT disposal – ‘Marren v Ingles right' to capital reward
Summary of tax position with liquidation