💼Crypto Loans
💎Lending Rewards
Income Tax
The new HMRC DeFi guidance on lending and staking indicates that lending rewards (including those from lending out your tokens) may not always be income rewards. It is necessary to consider if the nature of the rewards is capital or income.
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.
If the taxpayer is a ‘financial trader’ in cryptoassets these rewards may be treated as trading income rather than miscellaneous income.
Capital rewards are subject to capital gains tax and are not treated as miscellaneous income subjected to income tax - see below.
Capital Gains Tax
Capital rewards - CGT charged upon loaning out tokens and upon receipt of reward
The new HMRC DeFi guidance on lending and staking indicates that lending rewards (including those from lending out your tokens) may not always be income rewards. It is necessary to consider if the nature of the rewards is capital or income.
Capital rewards are subject to capital gains tax and are not treated as miscellaneous income subjected to income tax.
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.
See our detailed guidance on the tax position of capital reward upon loaning out your tokens and upon receipt of the capital reward.
If the taxpayer is a ‘financial trader’ in cryptoassets these rewards may be treated as trading income rather than capital rewards.
Acquisition cost of reward tokens
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.
Principal tokens loaned out
CGT disposal on entry and exit?
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:
Collateralised Loan examples:
See our collateralised loan examples showing the differing tax positions of the same scenario:
Example 2A - income reward - transfer of beneficial ownership
Example 2B - income reward - NO transfer of beneficial ownership
Example 2C - capital reward - transfer of beneficial ownership
Example 2D - capital reward - NO transfer of beneficial ownership
REPOS guidance
See our further guidance on REPOS with cryptoassets:
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