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Recap HomeCrypto Tax Guide (Lite)HMRC Cryptoassets Manual
  • A Technical Guide to Cryptocurrency Tax for UK Individuals
    • What are Cryptoassets?
    • Who are Recap?
  • CRYPTOCURRENCY TAX
    • Do I Need to Pay Tax on my Cryptoassets?
    • Which Taxes Apply?
      • Capital Gains Tax (CGT)
      • Income tax
      • VAT
      • Inheritance tax
      • Stamp Duty
    • How Much Tax Will I Pay?
    • New HMRC DeFi Guidance
      • Overview of HMRC guidance
      • 1️⃣Is the Reward Income or Capital?
      • 2️⃣Is Beneficial Ownership (BO) transferred?
      • 3️⃣Consider the Tax Treatment
        • Staker/Lender/Collateral Provider
          • Income Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1A
              • Example 2A
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Income Reward
              • Example 1B
              • Example 2B
          • Capital Rewards
            • BO transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1C
              • Example 2C
            • BO not transferred
              • ➡️At Point of Entry
              • ⬅️At Point of Exit
              • 💧On Liquidation
              • 💎On Receipt of Capital Reward
              • Example 1D
              • Example 2D
        • Borrower
    • Investor or Trader?
      • Badges of Trade Limitations
      • HMRC Approach
      • Court Cases involving Financial Traders
    • Capital Gains Tax
      • Calculating the Capital Gains Position
      • Disposal proceeds
      • Disposals to Connected Parties
      • Allowable costs for CGT
        • Exchange fees
        • Forks - affect on allowable costs
      • Capital Loss Claims
    • Income Tax
      • Financial trading income
      • Miscellaneous Income
      • Employment income
    • Fair Market Valuation
  • TRANSACTION TYPES
    • 💷Selling Crypto for Fiat
    • 🔄Trading Crypto to Crypto
    • 🛍️Purchases using Crypto
    • 🎁Gifts
    • 💍Spouse Transfers
    • 🎗️Gifts to Charity, CASCs & Bodies for a National Purpose
    • 🎈Airdrops
    • 🤝Staking
    • 💸Transfers
    • 🍴Forks
    • ⛏️Mining
    • 👛Employment income
      • UK Employer
      • Overseas employer
      • National Minimum Wage (NMW)
    • 🚨Lost & Stolen Crypto
    • 🎲Gambling
    • 💧Liquidity Pools
      • Example - Liquidity pool
    • ⬆️Token Upgrades/Swaps
    • 🔮Cryptoasset derivatives (CFDs, Futures and Margin Trading)
    • 💼Crypto Loans
    • 🔄REPOS
    • 🪞Reflections Rewards
    • 👥Referral Income
    • 💳Cashback
    • 🎨NFTs (Non Fungible Tokens)
    • 🎮NFTs earned playing games
  • Record Keeping
  • Filing Your Self-Assessment
    • How to Register for Self-Assessment
    • How to Fill In the Tax Return
    • Submitting the Tax Return and Paying the Tax
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On this page
  • New aspects to be considered
  • REPOS
  • Suggested approach

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  1. CRYPTOCURRENCY TAX
  2. New HMRC DeFi Guidance

Overview of HMRC guidance

PreviousNew HMRC DeFi GuidanceNextIs the Reward Income or Capital?

Last updated 3 years ago

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A lender/liquidity provider may earn a return/reward from the activity of lending or staking their cryptoassets. Also, an investor may provide their cryptoassets as collateral for taking out a loan.

explains that the tax position of the principal tokens locked away needs to be considered, at the time of entering and exiting the yield generating activity when:

o Lending out your cryptoassets

o Staking your cryptoassets

o Adding your cryptoassets to a liquidity pool

o Depositing cryptoassets as collateral for a loan you take out

This is in addition to calculating the tax position upon the ultimate disposal of the tokens (say cashing out for fiat or swapping for another token).

New aspects to be considered

The new HMRC guidance indicates that cryptoasset investors need to consider the tax treatment of lending and staking activities as set out below:

  • Return/reward generated from the yield generating activity:

    - taxed as income or capital gains?

- taxed at the time of entering activity, when received, or both?

  • Principal tokens locked away when staked/loaned/added as collateral: - capital gains tax disposal upon entry of the yield generating activity? - capital gains tax disposal upon exit from the yield generating activity?

REPOS

HMRC state:

'It will be a question of fact whether the tokens being loaned and borrowed or staked (as applicable) can satisfy the definition of a security for the purposes of sections 263A or 263B TCGA 1992. Generally tokens will not be securities for this purpose.'

The REPOS legislation (applying to shares and securities, not cryptoassets) serves to ignore the sale and re-purchase of the shares for capital gains tax purposes.

Suggested approach

We recommend a three step approach to working out the tax position:

The tax treatment depends on whether or not 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 or legal advisor on this matter.

Where an individual is carrying out a involved in the making of loans/staking; these activities would be subject to the normal trading tax rules, rather than those set out below for cryptoasset investors. However, it is only in exceptional circumstances that such activity would amount to a financial trade.

HMRC are clear in their guidance at that it is unlikely that the REPOs legislation applies to cryptoassets.

As HMRC do not expect cryptoassets to qualify as a security and benefit from this generous CGT exemption; they are expecting REPOS involving cryptoassets to realise a capital gain upon disposing of the cryptoassets and there will be a CGT re-acquisition when they are bought back (on the basis it is expected that of the tokens will transfer to another party). Therefore the tax position is covered by the guidance at below.

beneficial ownership
tax professional
financial trade
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beneficial ownership
Step 3
1️⃣Is the Reward Income or Capital?
2️⃣Is Beneficial Ownership (BO) transferred?
3️⃣Consider the Tax Treatment
HMRC's guidance