🤝Staking

What is Staking?

Staking is where you can stake some of your crypto to contribute to the Proof of Stake network of that asset. As a reward, you earn more assets from the network at a percentage rate over time.

Staking can also be a generic term used to describe locking away your tokens in a yield generating activity.

HMRC explains the term Staking at CRYPTO10300 as below:

This has developed as an alternative to Proof of Work due to the significant amount of energy and computing power that system requires. Under Proof of Stake, the ability to create a new entry is determined by a user’s wealth in the cryptoasset (or ‘stake’) rather than them having the computer power to solve a puzzle before anyone else does. Here, those verifying transactions are rewarded with fees for facilitating the transaction instead of any new tokens.

Tax Treatment of Staking

Income Tax

Income rewards

HMRC confirms that where a proof of stake activity does not amount to a trade, the sterling value (at the time of receipt) of any tokens received from staking will be taxable as miscellaneous income subject to income tax, with any allowable expenses reducing the amount chargeable.

The new HMRC DeFi guidance on lending and staking indicates that lending rewards (including those from staking) 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 staking 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.

See our detailed guidance...

pageMiscellaneous Income

Capital Gains Tax

Capital rewards - CGT charged upon staking and upon receipt of reward

The new HMRC DeFi guidance on lending and staking indicates that lending rewards (including those from staking) 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 time of staking the 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 exit), based on the value of the reward when received.

Upon entering the stake, 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 entering the stake.

There is a disposal of this 'Marren v Ingles right' upon receipt of the capital reward (usually upon ending the stake). 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 staking 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 staking 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 staked - CGT disposal?

HMRC guidance confirms that the tax position of the principal tokens locked away needs to be considered at the time of staking your cryptoassets.

The tax treatment depends on whether or not beneficial ownership 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 tax professional or legal advice on this matter.

Examples

See our staking examples to show the different tax positions of this same scenario:

• Example 1A - income reward - transfer of beneficial ownership

• Example 1B - income reward - NO transfer of beneficial ownership

• Example 1C - capital reward - transfer of beneficial ownership

• Example 1D - capital reward - NO transfer of beneficial ownership

Staking in Recap

Recap has been designed from the ground up to work out the capital gains impact of staking based transactions.

1. Simply connect your exchange accounts or wallets through our automated integrations or enter your data manually via the user interface or CSV file.

2. Recap only creates taxable events for staking reward transactions, generating acquisition and income tax events based on the cryptoasset's GBP market value which is determined by Recap's own market valuation engine using both foreign and cryptocurrency exchange rates.

3. See the tax impact of every staking reward transaction (example below) in the tax tab or download a PDF tax report