Income rewards received in exchange for loaning out your tokens will be taxable as miscellaneous income, subject to income tax. The sterling value of the reward tokens at the date of receipt will be the value of the taxable miscellaneous income.
A capital gain is realised on the capital reward at the point of loaning out your tokens (based on the estimated present value of the future capital reward). This gain upon entry is then re-assessed upon receipt of the capital reward (usually upon repayment to you of the tokens lent out), based on the value of the reward when received.
Upon lending out the tokens, when the capital reward is subjected to capital gains tax, there is also an acquisition of a ‘Marren v Ingles right' to receive the future capital reward. The acquisition cost of this ‘Marren v Ingles right' is the estimated present value of the future capital reward at the time of lending out the tokens.
There is a disposal of this 'Marren v Ingles right' upon receipt of the capital reward (usually upon repayment to you of the tokens lent out). The disposal proceeds are the sterling market value of the capital reward tokens received. The acquisition cost is the estimate of the future capital reward that was made upon entry. There is a capital gain where the estimation upon entry was too low, or a capital loss where is was too high. It is possible to make an election to carry back a loss from a 'Marren v Ingles right' against the capital gain upon entry.
The receipt of cryptoasset tokens as a lending reward is an acquisition of those tokens for CGT purposes, regardless of whether it is taxed as an income reward or a capital reward. The sterling market value at the date of receipt is the CGT acquisition cost. The acquisition of tokens is in not a CGT event.
When these tokens received as rewards are later disposed of, there may be a capital gain or capital loss depending on the change in value since acquisition and the application of the share matching rules, dictating which cost is offset against a disposal.
The new HMRC DeFi guidance confirms that the capital gains tax position of the principal tokens locked away/loaned out needs to be considered:
- at the time of loaning out your cryptoassets
- and at the time of receiving the repayment of your cryptoassets
There are no income tax implications for the principal tokens.
The capital gains tax treatment depends on whether or not beneficial ownership of the tokens locked away/loaned out have 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.
Our analysis of the tax position for the lender is split into the following scenarios:
See our further guidance on REPOS with cryptoassets: