Example 2B
No transfer of beneficial ownership upon adding collateral, an income 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 2C - capital reward - 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 for 1 year in March 2022, when worth £300,000
  • Borrowed 105,000 USDC in March 2022, when tokens worth £75,000
  • Reward of 5% pa received monthly on collateral in USDC
  • 10 BTC collateral is withdrawn in March 2023 when worth £200,000 and 105,000 USDC loan repaid at same date when worth £77,000.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 NOT 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 BTC for £500,000 fiat sterling in March 2024

There is no CGT disposal of the collateral upon locking it away.
For tax purposes any acquisition of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

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.

The disposal of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

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.

HMRC guidance indicates this lending reward is an income reward (rather than capital). The indicators pointing to an income reward are:
  • the reward is earned by providing a service to the lending platform (ie platform agreeing to pay 5% pa of the collateral to a lender whilst the collateral is locked away)
  • the reward is known at the time the agreement was made (ie 5% pa)
  • the reward is paid periodically throughout the period of collateral locked away (monthly)
  • the reward is paid by the lending platform
Therefore the USDC tokens received monthly as the income rewards are subjected to income tax (treated as miscellaneous income) when they are received. The income is the sterling market value of the USDC at each date of receipt.
Let’s say each month’s reward receipt was worth £1,250, so the total income over the year was £15,000. If the taxpayer has no self-employment income in the tax year, there will be the £1,000 trading allowance to offset against this miscellaneous income.
The acquisition cost of the USDC tokens received as an income reward is £15,000. When they are disposed of there will be a capital gains or capital loss, depending on the further change in value. There is unlikely to be much of a gain or loss on stablecoins though due to the minimal fluctuation in value.

Capital gain of £400,000 (£500,000 less original acquisition cost of £100,000) in the 23/24 tax year.
CGT of £80,000 (£400,000 at 20%) to pay for 23/24, due for payment to HMRC by 31 January 2025.
In total £80,000 CGT is paid on the 10 BTC on a total capital gain of £400,000. However, cashflow is improved where there is no transfer of beneficial ownership (see Example 2A) as half of this CGT did not have to be paid at the point of adding the collateral in 21/22.

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 not already disposed of for CGT purposes upon adding the collateral, there is now a CGT disposal of the 10 BTC upon liquidation.
According to the HMRC guidance at CRYPTO61640 and the HMRC example at CRYPTO61675, the disposal proceeds of the 10 BTC should be recorded as £200,000 (the market value at the date of liquidation). The acquisition cost is the original £100,000 paid for the 10 BTC.
Following the HMRC guidance, there is a capital gain of £100,000 in 22/23 upon liquidation, with CGT of £20,000 payable by 31 January 2024.
You are treated as selling the 10 BTC for £200,000, even though all you received nothing in return for giving up the collateral upon liquidation. The 105,000 USDC loan has been retained upon liquidation, but this should not be viewed as consideration for the collateral given up; because the loan is treated as acquired for and sold at market value for tax purposes, with the effect that you are only subject to CGT on the appreciation or depreciation in value for the period that the loan is in your possession.
In Example 2A and Example 2C, where this is a transfer of beneficial ownership upon adding the collateral, there is an overall loss on liquidation of £100,000. This seems fair and logical, because the collateral which cost £100,000 has been given up for nothing in return.
When following the HMRC guidance, the gain of £100,000 in this example and in Example 2D, where there is no transfer of beneficial ownership upon adding the collateral, is £200,000 more than in Example 2A and Example 2C. However nothing was received in exchange for the collateral in either example, and the £100,000 spent on the original purchase of the collateral is now lost in both cases. So it would seem logical that the overall tax position should be the same, regardless of whether or not beneficial ownership is transferred when the collateral is added.
If the HMRC guidance is not followed and alternatively the disposal proceeds upon liquidation in this situation are recorded as Nil (not market value as per the HMRC guidance), it realises a capital loss of £100,000, which is a true reflection of the loss by the taxpayer and seems to more fairly reflect the position.
It is recommended you seek professional tax advice regarding this matter, especially if you are considering taking a position that is not in agreement with HMRC's guidance.

  • Adding collateral - no capital gains tax event
  • Liquidation:
    • Following HMRC guidance: Capital gain of £100,000 in 22/23 - £20,000 CGT payable by 31 January 2024. The gain arises as the market value at liquidation was £200,000 and this is notionally treated as the disposal proceeds and the original cost of £100,000 is deducted to arrive at a gain of £100,000.
    • Possible alternative approach:
      Capital loss of £100,000 in 22/23 - £20,000 CGT reduction in 22/23 or future years (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 NO beneficial ownership transfer
At point of entry
Collateral added
Receipt of loan
At point of exit
Collateral removed
Repayment of loan
On receipt of income reward
On sale of BTC for fiat
What if there was a liquidation of collateral instead?
No CGT disposal - USDC loan
CGT disposal - collateral locked away
Summary of tax position with liquidation