Example 1A
Tax position for staker where INCOME REWARDS received and there is a transfer of beneficial ownership
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Tax position for staker where INCOME REWARDS received and there is a transfer of beneficial ownership
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See our other staking examples to show the different tax positions of this same scenario:
- income reward - NO transfer of beneficial ownership
- capital reward - transfer of beneficial ownership
- capital reward - NO transfer of beneficial ownership
Bought 10 BTC for £100,000 in October 2020
Staked 10 BTC staked in March 2022 for 1 year, when worth £300,000
Staking reward of 5% received monthly in USDC
10 BTC is un-staked in March 2023 when worth £200,000
No other acquisitions or disposals of BTC (assume matching rules not relevant for simplicity)
Assumed that beneficial ownership is 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
No redemption tokens are received upon staking; therefore a ‘right to receive a future quantity of tokens’ is treated as received
Sold 10 BTC for £500,000 fiat sterling in March 2024
Capital gain of £200,000 (£300,000 less £100,000) realised in the 21/22 tax year, upon staking the 10 BTC.
£40,000 CGT (£200,000 at 20%) is payable by 31 January 2023.
CGT is payable despite the fact that the £300,000 value subjected to CGT is locked away and no proceeds have actually been received. If the 10 BTC will still be locked away in January 2023, alternative funding will be needed to pay the CGT to HMRC.
There is also an acquisition of an asset worth £300,000 at the point of entry. As nothing was actually received, this asset acquired is a ‘right to receive a future quantity of tokens’ and this ‘right’ has an acquisition cost of £300,000 for capital gains tax purposes. Upon exit from the yield generating activity, this right will be disposed of in exchange for a repayment of the principal 10 BTC staked.
There is a capital loss of £100,000 in the 22/23 tax year, upon un-staking the 10 BTC. The disposal proceeds are £200,000, but the acquisition cost upon entry was £300,000. This capital loss of £100,000 in 22/23 cannot be carried back to reduce the £200,000 capital gain realised on entry in 21/22. Therefore the £40,000 CGT remains payable by 31 January 2023, even though the value of the BTC has dropped significantly in value. The £100,000 loss can only be set against capital gains in 22/23 and future years.
The 10 BTC un-staked has a CGT acquisition cost of £200,000.
HMRC guidance indicates this staking reward is an income reward (rather than capital). The indicators pointing to an income reward are:
the reward is known at time agreement made (ie 5% pa for one year)
the reward is paid periodically throughout the period of the staking (monthly)
the period of the lending is fixed and short-term (1 year fixed period)
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 £300,000 (£500,000 less value when un-staked of £200,000) in the 23/24 tax year.
The capital loss of £100,000 realised on exit in 22/23 was not used and was carried forwards to 23/24. Therefore the net capital gain in 23/24 is £200,000.
CGT of £40,000 (£200,000 at 20%) to pay for 23/24, due for payment to HMRC by 31 January 2025. This is in addition to the £40,000 paid on the £200,000 capital gain in 21/22.
In total £80,000 CGT is paid on the 10 BTC on a total capital gain of £400,000. No extra CGT has been payable as a result of the new HMRC guidance triggering a disposal upon entry and exit of the staking. It has just accelerated the payment of half of that CGT to the point of entering the staking activity, rather than it all being payable in 23/24 when cashed out for fiat.