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