Income Rewards
Where INCOME REWARDS are received for locking tokens up
The table below gives a brief overview of the tax position of the principal and reward, but should be read in conjunction with the detailed guidance and examples.
Known or ascertainable principal assumed: This summary assumes 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.
Transfer of beneficial ownership
No transfer of beneficial ownership
At Point of Entry
โ€‹
Principal staked/loaned out/collateral added
CGT disposal of principal tokens at current sterling market value of principal upon entry
Acquisition of either actual redemption/claim tokens or a known or ascertainable โ€˜right to receive future quantity of tokensโ€™ at same value as in disposal
Not a taxable event
At Point of Exit
Principal staked/loaned/collateral removed
CGT disposal of actual redemption/claim tokens or the โ€˜right to receive future quantity of tokensโ€™ acquired upon entry, for sterling market value upon exit of tokens received in repayment of principal
Acquisition of principal tokens staked/lent out at sterling market value upon exit
Not a taxable event
On Liquidation
Liquidation of collateral
CGT disposal of redemption/claim tokens or the โ€˜right to receive future quantity of tokensโ€™ which were received when collateral added. NIL disposal proceeds - capital loss via Negligible Value Claim)
CGT disposal of collateral, for sterling market value of collateral at time of liquidation**
On Receipt of Reward
Income (revenue) reward - known or ascertainable
Income reward taxable as miscellaneous income when received; sterling market value at date of receipt
Income reward not subject to CGT on entry, exit or on receipt
Acquisition cost is market value at date of receipt and subject to CGT when sold in the future
Income reward taxable as miscellaneous income when received; sterling market value at date of receipt
Income reward not subject to CGT on entry, exit or on receipt
Acquisition cost is market value at date of receipt and subject to CGT when sold in the future
** The DeFi lending platform is treated as a nominee for the borrower, so any gain or loss on a disposal of the tokens held as collateral by the DeFi lending platform is deemed to be the gain or loss of the borrower. The tokens disposed of to settle the borrowerโ€™s position are treated as disposed of at their market value in sterling.
For detailed guidance on the tax position where the yield generating activity provides income rewards, see our further guidance, based on whether or not there is a transfer of beneficial ownership:
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