💧On Liquidation

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

No CGT disposal - collateral locked away

The HMRC guidance on collaterised loans at CRYPTO61640 says there are no CGT consequences upon liquidation; where adding the collateral resulted in a disposal for CGT purposes. HMRC logic for this is the person already disposed of the collateral when it was added.

CGT disposal - redemption/claim tokens or 'right to receive a future quantity of tokens

Although there is no further guidance from HMRC on collaterised loans, there appears to be an argument that this is not the complete picture, as upon liquidation it is logical and fair that there may be a capital loss when the value of the collateral has reduced between adding the collateral and liquidation.

When the collateral was added on entry, there was a CGT disposal of the collateral. At the same time, there was a CGT acquisition of either:

1. redemption/claim tokens provided by the platform; or

2. a ‘right to receive a future quantity of tokens’; or

3. a 'Marren v Ingles right' to receive an unknown/ascertainable quantity of tokens in the future

In a liquidation situation, the redemption tokens/’right’ are probably still held, but are now worthless, as there is nothing left in the collateral pot to be claimed. It is arguable that in this situation a negligible value claim can be made; on the basis that the redemption tokens/’right’ have become worthless upon liquidation. A negligible value claim realises a capital loss equal to the acquisition cost of the redemption tokens/’right’ (at the time the collateral was added), as the disposal proceeds are Nil.

If the redemption tokens/'right' are actually disposed of upon liquidation (ie they are taken from your possession), there is a disposal for CGT purposes of those tokens/'right', rather than a negligible value claim. Where the value of the tokens has fallen since the collateral was added, this is likely to result in a capital loss (subject to the matching rules).

A negligible value claim is a mechanism for realising a capital loss where you still hold the tokens which have become worthless.

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

Upon liquidation it could be the case that no capital reward tokens are received and will ever be received; or capital reward tokens may be received, which may or may not have a lower value than expected.

Upon entry, the estimated capital reward was subjected to capital gains tax and a 'Marren v Ingles right' was acquired at the same time. The acquisition cost of the 'Marren v Ingles right' is the estimated present value of the future capital rewards that was subjected to capital gains tax upon entry.

Upon liquidation, a capital gains tax calculation is required for the disposal of the 'Marren v Ingles right' acquired upon entry.

Where no capital rewards are received, the disposal proceeds will be Nil and there will be a capital loss equal to the acquisition cost of the 'Marren v Ingles right'.

Where capital rewards are received, the disposal proceeds will be the sterling market value of the capital reward tokens at the date of receipt. The acquisition cost of the 'Marren v Ingles right' is deducted from the disposal proceeds.

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.

Example

Our Example 2C covers the liquidation of a collateralised loan with a capital reward, where there was a transfer of beneficial ownership upon adding the collateral.