With transfer of beneficial ownership upon adding collateral, an income reward and liquidation
- 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- 10 BTC collateral is withdrawn in March 2023 when worth £200,000 and 105,000 USDC loan repaid at same date when worth £77,000.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 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
Capital gain of £200,000 (£300,000 less £100,000) realised in the 21/22 tax year, upon adding the 10 BTC as collateral.
£40,000 CGT (£200,000 at 20%) is payable by 31 January 2023.
This CGT is due 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.
The CGT acquisition cost of the redemption tokens received when the collateral was added is £300,000. Upon removing the collateral, these redemption tokens will be disposed of, in exchange for a repayment of the principal 10 BTC collateral provided.
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.
There is a capital loss of £100,000 in the 22/23 tax year, upon withdrawing the 10 BTC collateral. 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 removed from collateral has a CGT acquisition cost of £200,000.
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 £300,000 (£500,000 less value when collateral removed of £200,000) in the 23/24 tax year.
The capital loss of £100,000 realised on exit (removing the collateral) in 22/23 was not used is that tax year 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 when adding and removing collateral. It has just accelerated the payment of half of that CGT to the earlier point of adding the collateral, rather than it all being payable in 23/24 when cashed out for fiat.
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 already disposed of for CGT purposes upon adding the collateral, there are no further tax consequences for the 10 BTC as they were transferred to the platform upon adding the collateral.
The redemption tokens are retained, but are now worthless as there is nothing in the collateral pot to be claimed. When the collateral was added, there was an acquisition of redemption tokens with an acquisition cost of £300,000.
Although there is no HMRC guidance on this point, it seem arguable that a negligible value claim can be made on the basis that the redemption tokens have become worthless upon liquidation. This realises a capital loss of £300,000 in 22/23. The disposal proceeds are Nil and the acquisition cost is £300,000.
This capital loss of £300,000 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 there has been a liquidation. The £300,000 loss can only be set against capital gains in 22/23 and future years.
- Adding collateral - capital gain of £200,000 in 21/22 - £40,000 CGT payable 31/1/2023
- Liquidation – capital loss of £300,000 in 22/23 - £60,000 CGT reduction in 22/23 or future years (providing there are capital gains to offset)
- Net capital loss of £100,000 – net CGT reduction of £20,000 (providing there are capital gains to offset). The £100,000 net capital loss is the cost of the original 10 BTC which was liquidated.