Is Beneficial Ownership (BO) transferred?
HMRC explains at CRYPTO61620 that considering whether the lender/liquidity provider actually transfers their beneficial ownership of the tokens will require an examination of the contract/terms and conditions. This will need to be done for each type of lending/staking activity that the taxpayer is involved in.
Where the recipient of the tokens has the ability to deal with the tokens received as they want, HMRC says at CRYPTO61620 that this will be a strong indicator that the recipient has acquired the beneficial ownership of those tokens. Conversely, if the recipient is specifically restricted from dealing with the tokens received, HMRC believes this will be a strong indicator that the recipient does not have beneficial ownership of the tokens received.
It is likely to be some time before we find out how much appetite HMRC will have to challenge a taxpayer's decision on whether or not beneficial ownership has been transferred.
There has been a great deal of discussion about when there is a transfer of beneficial ownerships on crypto tax forums such as the BitcoinUK tax channel on Discord, however as the posts are anonymous it is difficult to assess the credibility of the content and the information below is heavily caveated for that reason. It is apparent that the position is very uncertain and complex and needs to be determined for each situation based on the facts, however, the general consensus seems to be:
- Staking for proof of stake consensus (e.g. Ethereum 2 POS) is not a disposal, as no beneficial ownership transfers to another party. Proof of stake staking should be viewed as akin to mining.
- Entering most liquidity pools is probably a disposal, as beneficial ownership usually transfers when entering; but it depends on the details of how the protocol works.
- Providing tokens as collateral is most likely to be a disposal, as beneficial ownership probably does transfer when collateral is added. There would be a disposal if there is clear evidence, such as a statement in the terms and conditions, that the platform/protocol treats the crypto as its own asset and uses that crypto (ie lending it on), probably in the form of a REPO.
It could be argued that you can still retain beneficial ownership of your tokens when they are staked/loaned out. It would seem plausible that beneficial ownership may be retained if you can withdraw the tokens at any time, retain all financial benefits and benefit from price appreciation. However, this is such a complex legal point that professional advice should be sought before arriving at a decison.
In Step 3, we set out the tax position for the yield generating activity, based on whether it is an income or capital reward and depending on whether or not there is a transfer of beneficial ownership.