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.
** 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 borrower’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: