➡️At Point of Entry

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

The tax position of the principal tokens locked away needs to be considered at the time of entering the yield generating activity.

The tax treatment depends on whether or not beneficial ownership of the tokens locked away has been transferred to another party. This is a very complex decision and please see our further guidance on this, but ultimately seek expert help from a tax professional or legal advice on this matter.

CGT disposal - principal tokens locked away

Known or ascertainable principal assumed: It is assumed 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.

If there is a transfer of beneficial ownership of your cryptoassets to another party/platform/protocol, the new HMRC guidance at CRYPTO61620 concludes this is a disposal of those cryptoassets (your loaned principal/staked principal/collateral provided) for capital gains tax purposes, upon entering the yield generating activity.

The disposal proceeds are the sterling market value upon entry of the principal tokens locked away. The acquisition cost of the principal tokens are deducted from the disposal proceeds. The acquisition cost is taken from the S104 pool (ie average cost of prior acquisitions), unless there is an acquisition of the same type of tokens within the 30 days following entering the yield generating activity. See more guidance here on how the costs are matched.

Where the market value of the tokens entering the activity is more than the ‘matched’ acquisition cost, there is a taxable capital gain upon entry. Where the value is less than the acquisition cost, there is a capital loss upon entry.

Tip:

This new guidance presents an opportunity for loss harvesting. Where beneficial ownership is transferred upon entering into a yield generating activity, this triggers a capital gains tax disposal of your cryptoassets. If at the time of entry, the tokens are worth less than their capital gains tax acquisition cost (ensuring you navigate the complex matching and bed and breakfast rules), a capital loss is realised. This capital loss will reduce capital gains in the same tax year, or will be carried forward against future capital gains if not used.

CGT acquisition - redemption/claim tokens or a ‘right to receive future quantity of tokens’

At the point of entry, in exchange for disposing of the cryptoasset tokens locked away, there is also an acquisition of either:

o redemption/claim tokens – often the case for staking/liquidity pools

o a ‘right to receive future quantity of tokens’

Regardless of which of the two is received, the tax position is the same, because in both cases you know the quantity of tokens you will receive upon exiting the yield generating activity.

The acquisition cost of the redemption tokens received or the ‘right to receive future quantity of tokens’ you are treated as receiving is the sterling market value of the principal tokens locked away (valued at the date of entry).

This market value of the tokens locked away at the date of entry of the activity is the same figure as the disposal proceeds used in the capital gains calculation for the disposal of the principal tokens locked away.

Where upon entering the yield generating activity, the tokens are worth significantly more than their acquisition cost, this will realise a significant capital gains tax liability, which may need to be paid to HMRC whilst your cryptoassets are still locked away.

See our Example 1A illustrating the tax position at each point in the lifecycle of staking tokens where there is a transfer of beneficial ownership and income rewards are received.