On 2 February 2022, HMRC released a much anticipated and needed update to its Cryptoassets Manual, expanding its coverage of Decentralised Finance (“DeFi”). Included in the update was guidance and clarity around crypto staking tax in the UK, the tax treatment of staking tokens, and the income received from the staking activity for companies and individuals.
In our work with cryptocurrency clients, generally we see staking taking the following path:
- An exchange of one token for a staked equivalent of the token
- The staked token is held on an exchange
- Staking rewards (as defined below) are added to the account/wallet of the user
Here’s more detail about those steps.
Exchange of one token for a staked equivalent
In step 1, one token has been exchanged for another. Within its guidance, HMRC has reiterated its previous guidance that the exchange of one token to another is a chargeable transaction: you are exchanging one asset with one set of rights for another asset with a different set of rights.
As such, the difference in between the GBP value of the crypto at the date of acquisition and the GBP value of the crypto at the date of the exchange will realise a capital gain (or loss) which will be subject to capital gains tax (if the exchange is made by an individual) or corporation tax (if the exchange is made by a company).
Staked token is held on an exchange
In step 2, the transfer of the token to the exchange may or may not be a disposal. It depends on:
- whether the beneficial ownership of the token has been transferred to the exchange (i.e. the exchange can do with the token as it wishes); or
- whether there is a restriction on what the exchange can do with the token (i.e. it must be kept in a wallet and may be pooled with other users’ tokens but cannot be sold or lent to others).
If there is a change in beneficial ownership, then a disposal is likely to have occurred. We explain this further in our article on collateral-backed lending.
Staking rewards added
In step 3, the earning of a return on the staked asset (known as “staking rewards”) is seen by many as akin to receiving interest on cash in a deposit account. However, HMRC has reiterated that the staking rewards will not be taxed as “interest”. Rather, they will be subject to tax under the “sweep-up provisions” which will categorise the staking rewards as “miscellaneous income”. This means that the staking rewards, valued in GBP at the date they arise, will be subject to income tax (if the rewards are earned by an individual) or corporation tax (if they are earned by a company).
Where you are receiving staking rewards, it’s important to consider whether the annual £1,000 “Trading and miscellaneous income allowance” could be applied to reduce the amount of income tax arising on the income. Before it is applied, you should see advice to ensure that you aren’t going to claim it incorrectly and therefore underpay the tax due on the income.
Find out more about our crypto tax and accounting services here.
Our other articles on the February 2022 updates to HMRC’s Cryptoassets Manual: