So you invested in cryptocurrency in spite of the tax complexities, nudge letters by HMRC and the tax liability that HMRC are sure to come asking for. Congratulations and welcome to the anti-fiat currency club!
In all seriousness, crypto taxes can be very easy or very complicated. While the industry has seen tremendous growth over the last few years, the regulators and HMRC have lagged behind the technology. With Accointing.com you can simplify your crypto taxes, however, even with the best tools there are many questions surrounding cryptocurrency taxation. This guide is meant as a quick reference tool where you will find answers to your most frequently asked questions about cryptocurrency and Bitcoin taxes.
General Crypto Tax Questions
Do you pay UK tax on crypto?
Buying crypto with fiat such as GBP is not taxable. However, the moment you make any trades or put your crypto to work, you will have to report and pay taxes on your crypto income and gains.
How is crypto taxed in the UK?
There are two types of taxes that individuals will generally be liable for on their crypto:
- Capital Gains Tax (CGT) – for trades and sales
- Income Tax – for income such as staking
If you qualify as a trade or business, you will be treated as such and Income Tax with the applicable business tax laws will take precedence. Based on the guidance provided by HMRC, it is not likely that many will qualify as a trade or business, only actual businesses with high volume of business activity will qualify.
I get paid in crypto, how is this taxed in the UK?
If you get paid in crypto this is considered ‘money’s worth’ and the payments are subject to both, Income Tax and National Insurance Contributions on the value of the cryptoasset.
Do I need to file taxes in the UK?
Because most people in the UK pay their taxes directly, through Pay As You Earn (PAYE) as employees, most people are not required to file a Self Assessment tax return. Self Assessment applies to you if you:
- Are self-employed
- Are a partner in a business partnership
- Have untaxed income
- Have capital gains where you: disposed of assets worth £49,200 or more; have a capital loss but your gains net of any losses are more than the annual exemption of £12,300; or your gains are more than the annual exemption of £12,300
I have less than £12,300 of gains, do I need to send a Self Assessment tax return?
If your total gains before considering any losses exceed £12,300, then you need to send a Self Assessment tax return. Consider the examples below:
- Joe’s total crypto gains for the year consist of £15,000 of gains and £10,000 of losses for a net £5,000 gain. Joe needs to send a Self Assessment tax return since his gains are over the £12,300 exclusion.
- Jason’s total crypto gains for the year consist of £8,000 of gains and £1,000 of losses for a net £7,000 gain. Jason is employed and pays tax directly, so he would not otherwise send a Self Assessment tax return. Jason does not have to file a Self Assessment tax return due to his crypto trading as his gains are under the £12,300 exclusion.
Crypto is private so HMRC can’t see it, right?
False. Everything on the blockchain is fully visible to anyone who knows your public address. There are also many on-chain tools that regulators can use to track your crypto. Just report your taxes – tax evasion is a crime.
What guidance have HMRC put out on taxation of cryptocurrency?
HMRC have offered extensive guidance on taxation of cryptoassets. In HMRC’s Crypto Assets Manual, they define cryptoassets as “cryptographically secured digital representations of value or contractual rights that can be: transferred; stored; traded electronically.“ This definition basically covers any coin, token, NFT or other form of contract used for trading or storing value.
HMRC classify crypto into several categories, what significance does this have for my crypto taxes?
HMRC classify cryptoassets into exchange tokens, utility tokens, security tokens and stablecoins. They then go on to state that “the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.” This would imply that depending on the category, there might be different methods of taxation. However, regardless of the category a cryptoasset fits into, gains will be taxed as capital gains while any income will be taxed as other income.
Using Accointing.com and Finding a Crypto Tax Accountant
Do I have to connect all my wallets or only the exchanges on which I trade?
In order for Accointing.com to provide you with an accurate tax report, it is critical that you connect all your wallets and exchanges, including cold storage wallets. Your crypto taxes are dependent on all of your transactions, so if you don’t connect a wallet, we won’t be able to identify the non-taxable transfer nor will you be able to track the tax basis of the crypto.
Is my staking (mining, rewards, airdrops) included in the net capital gains / losses amount?
Trades and sales of crypto assets to which Capital Gains Tax applies, are reported on the Capital Gains Tax Summary SA108 fields 14 – 22, while income from staking or any other crypto activity is reported on your main Tax Return under Other UK Income, field 17.
Do I need crypto tax software to file my crypto taxes?
While you could theoretically keep track with a spreadsheet, this would be extremely time consuming and difficult to do accurately. Accointing.com makes this easy for you by helping you connect all your exchanges and wallets and automatically generating the most accurate tax report for all your crypto transactions.
Any advice on finding a crypto Accountant?
If you have a complicated crypto-tax situation, you should focus on finding a tax professional who understands crypto. How can you do this?
- Check their website – do they have a dedicated landing page for crypto clients? Are they a niche crypto firm? Do they even mention crypto / digital assets on their website?
- Schedule a call with them, talk about your current financial situation, crypto and non-crypto. Do they seem knowledgeable?
- Do they speak crypto?
- Do they have other clients with similar situations?
Make sure to ask how they charge for their work. If you need help finding an accountant, check out our partners page for a list of our UK crypto tax partners.
Any advice on working with an Accountant and using Accointing.com?
Accointing.com is designed to be the most user-friendly crypto tax software out there. You can easily connect all your wallets and exchanges and track your crypto portfolio with our iOS or Android apps. Then you can share access to your account with your accountant who can help you classify your transactions and make sure your data is correct for filing your Self Assessment tax return. Use the app and tracking tools all year, and be ready for crypto taxes.
I file my own tax return with an online tax tool. Can I still use Accointing.com?
Yes! Accointing.com is designed to be the most user-friendly crypto tax software out there. You can easily connect all your wallets and exchanges and track your crypto portfolio with our iOS or Android apps. When it’s time for taxes, you can simply download your tax reports and use this information as you complete your Self Assessment tax return with your favorite tax tool.
Is HODLing taxable?
No. Simply holding a digital asset is not taxable. If you are earning income (rewards, staking, yield, etc) on this asset, that income is taxable as ordinary income.
So if I HODL my crypto in an undeclared wallet, they will never know.
FALSE! To get your crypto into your wallet, you likely purchased it through an exchange with KYC such as Coinbase, Binance, Kraken, Gemini, FTX, Mandala or any reputable exchange. HMRC are able to make the links from the exchange to your wallet. Remember that tax evasion is a crime.
If I only HODL and don’t trade my crypto, do I have to report crypto taxes?
If you have no taxable trades then you do not have to report Capital Gains Tax. You might still have to send a Self Assessment tax return due to other types of taxable crypto income, such as staking or rewards.
What if I transferred my crypto to a wallet?
The transfer of crypto to your wallet, whether a hot or cold wallet, is not a taxable transaction. Careful – some tax reports assume that transfers out are taxable as they do not know you are transferring crypto to yourself. Be careful and don’t use an exchange tax report without verifying its accuracy by connecting to Accointing.com.
Mining, Staking and Crypto Yield
Do HMRC have guidance on Proof of Work and Proof of Stake?
I mine Bitcoin, how is this taxed?
HMRC have issued extensive guidance on mining activities, but you must first determine if your mining qualifies as a trade or business. Note that HMRC do not expect that most individuals would have enough activity to carry on a trade.
Regardless of whether mining amounts to a trade or business, mining rewards are taxed based on the pound sterling value at the time of receipt of any coins or tokens received. According to HMRC, If the activity does not amount to a trade or business, then it is taxed as miscellaneous income with any appropriate expenses reducing the amount chargeable. If the activity amounts to a trade, then profits must be calculated according to the relevant business tax rules.
If the miners keep the coins received, then Capital Gains Tax or Corporation Tax on Chargeable Gains is applicable upon disposal of the coins.
I have to pay tax on my mining rewards and when I dispose of the coins, am I being double-taxed?
No. You would pay income tax when you receive the coins, and Capital Gains Taxes only on your profit when you dispose of the coins. Suppose you mined 1 BTC worth £40,000 at the time you earn this BTC. You would pay income tax on the £40,000 value at the time of receipt of the coins. If you later dispose of this BTC for £60,000, you would have a £20,000 capital gain (proceeds £60,000 less cost basis of £40,000). If instead you later sell for £30,000, then you would have a £10,000 capital loss (£30,000 – £40,000).
As you can see, you pay tax on 100% of the value, but as the value you pay income tax on becomes your tax basis, you will not get double taxed.
I stake my Solana / Cardano / Tezos, how is this taxed?
Regardless of whether staking amounts to a trade or business, staking rewards are taxed based on the pound sterling value at the time of receipt of any coins or tokens received. According to HMRC, If the activity does not amount to a trade or business, then it is taxed as miscellaneous income with any appropriate expenses reducing the amount chargeable. If the activity amounts to a trade, then profits must be calculated according to the relevant business tax rules.
If the stakers keep the coins received, then Capital Gains Tax or Corporation Tax on Chargeable Gains is applicable upon disposal of the coins.
I stake my Ethereum but cannot access rewards yet, is this taxable?
You will not find any tax authority with a concrete answer on this question. However, a strong case can be made that ETH 2.0 rewards that cannot be currently redeemed should not be taxable until the taxpayer obtains control of the rewards. In other words, the moment you can trade or withdraw the coins, they should be taxable then.
I purchased crypto and have not traded it, but I am earning rewards / staking / generating yield with it. Do I owe crypto taxes on this?
Yes, the purchase of your crypto or HODLing is not a taxable event, but earning any type of income is taxable based on the fair market value of the crypto at the moment that you obtain control of it. This means that if you are staking a coin and receiving rewards every three days, you will have about 121 different points in time at which you will need to value your rewards.
Accointing.com automates this for you by connecting to your favorite exchanges and blockchains.
How are airdrops taxed?
Airdrops may or may not be taxable income depending on whether you received the coins in a personal capacity or in exchange for services. HMRC explain that where coins were received without doing anything in return, not part of a trade or business involving cryptoasset exchange tokens or mining, income tax will not apply to airdropped tokens. However, if the tokens are airdropped in exchange for services, then income tax will apply and the value of the coins at the time of receipt will be considered either miscellaneous income or gross receipts of the trade or business.
Are soft forks and hard forks taxable?
Neither soft forks nor hard forks are taxable events at the moment the fork happens according to HMRC. For soft forks, since no new coins are created, the fork is ignored for tax purposes. For hard forks, while there is no income tax on the receipt of the new coins, you have to allocate the section 104 costs of the original coins between the old coins and the new coins based on a just and reasonable basis. After the initial allocation of costs, that coin will have its own section 104 pool, and any disposition will be subject to capital gains tax.
I earn rewards on my crypto, how is this taxed?
HMRC have not issued guidance on many types of transactions. However, it would appear reasonable to assume that any crypto received for doing something (validating, lending, taking quizzes) would be seen as taxable income by HMRC.
What are the tax implications of nodes such as Strong?
There is no guidance on taxation of nodes such as those of Strong. This is yet another case where technology is moving faster than regulation. However, we can all agree that there are various taxable events associated with nodes. When you create a node, this is a taxable event as your STRONG will have a gain or loss based on its change in value since you purchased it. The creation of the node and monthly fees can be seen as expenses. Any income from these nodes would be subject to Income Tax, taxed as miscellaneous income unless you are doing this through a trade or business.
I issue DeFi loans / provide liquidity as a business, how am I taxed on my earnings?
HMRC explain that just like with individuals buying and selling cryptoassets, only under exceptional circumstances would they expect that individuals would be considered to be carrying on a trade or business. How can you tell if you are in a trade or business? HMRC point us to look at BIM56800, which explores case law and other circumstances.
In the case that you are carrying on a DeFi trade, your earnings would be taxed according to the relevant business tax rules. The value of any tokens received as earnings would be includible in your gross income.
I traded my BTC for ETH, as long as I don’t cash out, this is not taxable right?
Trading one crypto for another is a taxable event. HMRC explain that gain or loss must be calculated to determine if Capital Gains Tax must be paid each time that you:
- sell tokens for money
- exchange tokens for different tokents
- use tokens to pay for goods or services
- give away tokens to another person (unless it’s a gift to your spouse or civil partner)
We must emphasize that exchanging tokens for different tokens is taxable. This means that each time you trade one crypto for another, even between stablecoins, it is a taxable event on which you must compute your gain or loss.
I need to sell my crypto for fiat, do I have to pay taxes?
Trading crypto for fiat is a taxable event and gain or loss has to be computed to determine whether you need to pay Capital Gains Tax. UK taxpayers also have the £12,300 exclusion available to them, so if your gains are below this amount, you do not have to pay tax on this.
I’m a high volume trader, how do I pay taxes?
By connecting your wallets and exchanges with Accointing.com, we will generate a tax report taking into account each and every trade.
I’m a high volume trader, can I report as trading instead of investing?
While there is no bright-line test to determine if your trading amounts to a trade, HMRC explain that:
“Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.”
It is worth noting that HMRC reiterate this concept throughout their Cryptoassets Manual. What we can conclude from this, is that for you to qualify as a trader, you should actually have a business trading and not merely a hobby. How can you tell if you are in a trade? HMRC point us to look at BIM56800, which explores case law and other circumstances. If you are unsure of whether your trading is considered a financial trade, it is best to seek advice from a tax professional.
If your activity is considered trading, then you will be responsible for Income Tax on your financial trade. If your activity is not trading, then it is an investment activity and will therefore be subject to Capital Gains Tax.
I’m a trader and need to pay tax on my trading profits, can I use Accointing.com?
Yes! While in this case you would be subject to Income Tax, not CGT, you can use your Accointing.com tax report to determine your gross income and allowable expenses.
I want to sell my DOGE but I would be over the £12,300 exclusion, should I sell?
While DOGE has certainly proven to endure the test of time, if you are holding a coin that you don’t want to have for the long-term, you must always consider the economics of a trade first, then the tax implications. It is generally a good strategy to not incur more than £12,300 of gains per year to maximize your after-tax crypto, however, you don’t want to hold a coin that might decrease in value 80% just because you are waiting for the right time to sell. Always consider the economics first and taxes second, but always do consider the tax implications and set aside some funds for your tax bill.
How do I calculate my gain or loss for a trade?
Use the following equation to calculate your gain or loss:
Proceeds from sale – cost basis = taxable gain or loss
Proceeds from sale: If you are converting into fiat, this is the amount of fiat you get for your crypto (after any fees). If you are converting to another crypto, it is the value of the acquired crypto at the time of the trade.
Cost basis: What you acquired your crypto for – if purchased with fiat, is the amount you bought it for plus any fees on the trade. If purchased with another crypto, it’s the value of the crypto at the time of acquisition plus any fees on the trade. If you acquired crypto at different prices, then you have to use the pooling method also known as the section 104 pool.
Are my transaction fees deductible?
According to guidance from HMRC, most transaction fees, while not directly deductible at the moment of acquiring your crypto, are an allowable cost of acquiring the tokens to be factored into your CGT calculation. While the guidance gets lengthy, the TLDR is that if your fees are related to acquiring an asset (part of a trade) they are an allowable cost; If your fees are related to depositing or withdrawing GBP, they are not an allowable cost.
How does the section 104 pooling method work, and does Accointing.com provide reports taking this into account?
Yes! Accointing.com provides tax reports based on the section 104 pooling method, just make sure your country is set to United Kingdom in your Tax Preferences.
The pooling method pools together costs for the same asset and averages out the cost in order to avoid having to identify the units that are disposed of.
For example, suppose you bought 1 BTC in 2019 for £4,000, 1 BTC in 2020 for £8,000 and 1 BTC in 2021 for £29,000, your section 104 pool would be £41,000 (£4,000 + £8,000 + £29,000). Unless you make additional BTC purchases, this means your section 104 pooling cost per coin would be £13,667 (£41,000 / 3 BTC). If you sell 1 BTC for £40,000, your gain will be £26,333 (£40,000 – 13,667). Let’s see how this works in an example similar to HMRC’s.
|Date||Qty of BTC||Pooled allowable costs|
|Total Pooled Costs||3||£41,000|
- You sell 1 BTC for £40,000
- Consideration: £40,000
- Less allowable costs £41,000 x ( 1 / 3) (£13,667)
- Gain: £26,333
- Pooled cost remaining, £27,333 allocable to 2 units of BTC
|Date||Qty of BTC||Pooled allowable costs|
|Sale of BTC||(1)||(£13,667)|
|Total Pooled Costs||2||£27,333|
Do I need to use section 104 pooling for NFTs?
No. Since every NFT is unique, the pooling method does not apply and you must identify each NFT separately.
I only traded a small amount, do I have to report this?
Every trade of crypto-to-crypto or crypto-to-fiat is a taxable event. However, if your net gains amount to less than the £12,300 exclusion, there won’t be any tax on this. If your gains before considering your losses are less than £12,300, you may not even have to send a Self Assessment tax return.
Can you explain the ‘bed and breakfasting’ rule and how to avoid this?
The ‘bed and breakfasting’ rule exists to prevent taxpayers from selling coins with unrealized losses, deducting the losses and purchasing the same coins back putting themselves in the same position as before, but having claimed the tax losses. If you dispose of coins / tokens and then buy the same coins / tokens back within 30 days, then you use the basis of the newly purchased coins against your sale. Any excess coins acquired over what you disposed of go into the section 104 pool.
If you sell coins because they have tax losses you want to harvest, do not buy back the same coins within 30 days. It would be best if you find another asset correlated to your first asset if you want to keep market exposure during this period of time.
Can you explain the same-day rule and when this applies?
This rule exists to simplify reporting in cases where multiple coins of the same type are acquired and disposed by the same person on the same day. Rather than having to refactor the section 104 pools at each purchase and sale, all coins acquired that day are treated as acquired in a single transaction, while all coins disposed that day are also treated as disposed in a single transaction. After this, the acquisitions get matched to the disposals so that only the excess goes into a section 104 pool (or uses section 104 pool costs if excess sales). Note that the 30-day rule (bed and breakfasting) would be considered before the section 104 pool.
Pooling, 30-day rule, same-day rule – how do I know which rule applies?
Based on HMRC guidance, if applicable, the same-day rule applies first. Any excess coins acquired or disposed (after applying the same-day rule) are considered for the 30-day rule. If the 30-day rule doesn’t apply, then you would use the section 104 pooling method.
My crypto was stolen, can I deduct this loss?
No. If your crypto is stolen, this is not considered to be a disposal by HMRC as they state that since you have the right to recover the asset, you cannot claim a loss for Capital Gains Tax.
I lost my private keys, can I deduct this loss?
HMRC does not consider losing your private keys a disposal for Capital Gains Tax purposes, therefore, losing your private keys will not suffice to claim a loss. They do expand that if it can be shown that there is no possibility of recovering your keys or accessing the coins, then a negligible value claim could be made, which has to be accepted by HMRC. If the claim is accepted, you would be treated as disposing and re-acquiring of the coins lost so that your loss can be claimed.
I got rug pulled, can I deduct this loss?
A rug pull generally involves the issuer of the coin (or NFT) disappearing and leaving you with a worthless asset with no liquidity. HMRC states that if you actually receive the tokens and they become worthless, you may be able to make a negligible value claim to HMRC. You might also be able to claim the loss by sending the tokens to a burn address, since you would be disposing of them and never be able to reacquire them.
If I donate crypto to a charity, is this deductible?
Yes! Tax relief is available for donations to UK and some EU charities. For more information, refer to HMRC guidance. In addition, you will not have to pay Capital Gains Tax on the donated crypto, provided that the donation is not a tainted donation (kickback) or if the crypto is sold to the charity for more than the acquisition cost.
HMRC Tax Compliance
What is the capital gains tax rate applicable to crypto in the UK?
The capital gains tax rate in the UK is 20%, unless you pay basic rate income tax and your taxable income is within the basic income tax band of £50,270, in which case the tax rate is 10% on your capital gains.
What are the income tax rates in the UK?
The table below shows you the tax rates applicable for each band (basic rate, higher rate, additional rate) which are based on your taxable income.
When do I have to pay National Insurance Contributions?
Income Tax and National Insurance Contributions apply on your earnings, based on the value at the time of receipt, if you get paid in crypto, mine crypto, stake crypto or obtain airdrops subject to income tax.
If I have a net capital loss, how much can I deduct and can I carry this forward if not fully used?
Capital losses cannot offset income, but they can be carried forward indefinitely against future gains. The use of losses from previous years is limited so that the annual exclusion is maximized – in other words, losses from a previous year will only offset your gains to the point that they are under the annual exclusion, while the remaining losses can continue to be carried forward indefinitely.
Can I just convert to Monero and not pay taxes?
This would be tax evasion which is a crime. Besides, you would never be able to cash out without scrutiny.
What records should I keep for my crypto taxes?
HMRC is very clear in their guidance when they state that:
“Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.
The onus is therefore on the individual to keep their own records for each cryptoasset transaction.”
What records do you need to keep?
- Hot or cold crypto wallets containing taxpayers’ crypto transactions
- Other records such as transaction history file from exchanges
- Bank statements or other records showing the deposits and withdrawals of fiat currency
- Transaction history containing:
- The type of cryptoasset
- Date of every transaction
- Type of transaction
- Units of crypto and value in GBP at the time of the transaction
- Cumulative total of assets
Fortunately, this is all information that will be kept for you with Accointing.com (however, you must retain the source documents and files).
When is my Self Assessment tax return due?
If you file a paper tax return, then the deadline for the current tax year is 31 October 2022. If you file online or with a CPA, the deadline is 31 January 2023. Any payment of tax you owe is due on 31 January 2023. HMRC must receive your return and payment by the deadline.
What is the tax year in the UK?
The current tax year runs from 6 April 2021 to 5 April 2022. The new tax year started on 6 April 2022 and will end on 5 April 2023.
Where are crypto taxes reported?
While the input may look different depending on the tax tool, gains from cryptoassets should be reported on Form SA108 which is used to report your Capital Gains Tax with your Self Assessment tax return.
Report cryptoassets under ‘Other property, assets and gains’ fields 14 through 21. You can match this information to your Accointing.com tax report to simplify your filing. Make sure to maintain a copy of your tax report used for your records.
I got a nudge letter from HMRC, what should I do?
When in doubt, you can contact one of our partners who can provide you with a personalized opinion. The best advice is to be open and cooperate with their request, and be sure to report all of your crypto trades and income in your Self Assessment tax return.
I have never reported my crypto taxes, what should I do?
First you should assess whether you have had Capital Gains in excess of the yearly allowance of £12,300 or other income that you failed to report. If you are under the tax-free allowance, then just make sure to keep your tax reports and report your taxes when you are over this allowance. If you should have filed, we would recommend seeking the advice of a tax professional.
How can I legally minimize my crypto taxes?
There are many strategies that crypto investors can use to minimize their taxes and maximize their after-tax gains:
- Plan so your net capital gains are under the Annual Exempt Amount of £12,300 each year
- Sell any cryptos with unrealized losses in order to claim those losses – do not repurchase back within 30 days to avoid the bed and breakfasting rule
- Sell cryptoassets with a gain to maximize your Capital Gains Tax allowance, then have your spouse or civil partner buy them back to realize the gain, avoiding the 30-day rule and retain your assets
DeFi Taxes and NFT Taxes
How are NFTs taxed?
Exactly the same as crypto until further notice by HMRC. While they have not issued much guidance, what we do know is that as NFTs are each separately identifiable, you should not use the section 104 pooling method, but rather identify separately. Other than this subtle difference, NFTs are merely a different type of digital asset also on the blockchain. Therefore they are taxed as investment property, exactly the same as other cryptoassets. Accointing.com can help you keep track of all your NFTs and cryptos in one central location and provide you with the most accurate crypto tax report.
If you are a creator of NFTs or a dealer of NFTs (a trade or business) then you will be subject to income tax instead of Capital Gains Tax.
If I only buy an NFT and don’t trade it, is this taxable?
If you buy an NFT with crypto, it will be a taxable event due to the sale of the crypto you are using to purchase. If you buy an NFT with fiat, then it is not a taxable event, similar to buying crypto with fiat.
Are DeFi transactions taxable?
Transactions on a decentralized exchange such as Uniswap or PancakeSwap are taxable just like transactions on any centralized exchange. Accointing.com can help you connect all your DeFi wallets and produce the most accurate DeFi tax report in the market.
Can I deduct my Ethereum gas fees?
Gas fees related to the acquisition of an asset are part of your section 104 pool of costs of the cryptoasset you acquired. HMRC has not issued guidance on gas fees that cannot be directly associated with the acquisition of a crypto asset, though a case can be made that they are in fact a deductible cost to acquire your assets. If you have incurred significant gas fees, it is recommended to find a tax advisor to help you navigate this.
If you have a trade of business, all fees are deductible business expenses.
What exactly does HMRC’s DeFi guidance cover?
HMRC issued guidance for Decentralized Finance (DeFi) lending and staking in early 2022. They clarify that while there is no statutory or legal definition of “lending” and “staking” in this context, their guidance applies to anyone who transfers control of tokens to another party through a lending or a liquidity providing transaction.
If you are lending or borrowing using a DeFi platform, or otherwise providing liquidity or depositing any coins into any DeFi protocol in exchange for a yield, then this guidance applies to you.
Do I need to pay Income Tax on my earnings from DeFi?
Yes. The keyword here is earnings – any return of capital is not taxable. For any receipt of coins / tokens, any portion that is attributable to a capital receipt will not be chargeable to income tax, but would be within the scope of Capital Gains Tax. For any amounts attributable to a return / interest / yield / income, income tax would apply.
If the earnings are within a trade or business, then they would be subject to income tax based on the relevant business tax rules.
If the earnings are not within a trade or business, then they are subject to income tax as miscellaneous income.
Is Capital Gains Tax applicable to lending crypto?
It depends on who retains beneficial ownership of the coins / tokens in a lending transaction. According to HMRC, this would require an examination of the contract and terms and conditions. While no bright-line test is provided, they do state that if the recipient of the asset is restricted from dealing the coins / tokens, then this would be a strong indicator that beneficial ownership has not been transferred. However, if the recipient is able to deal the asset, then it is likely that beneficial ownership has been transferred.
For the lender (liquidity provider / staker), if beneficial ownership is transferred, then it is a taxable disposal subject to Capital Gains Tax. If it is not, then this will not be a taxable event.
Is Capital Gains Tax applicable to using my appreciated crypto as collateral?
It depends on who retains beneficial ownership of the coins / tokens used as collateral. According to HMRC, this would require an examination of the terms and conditions. While no bright-line test is provided, they do state that if the lending platform is restricted from dealing the coins, then this would be a strong indicator that beneficial ownership has not been transferred. However, if the lending platform is able to deal the coins, then it is likely that beneficial ownership has been transferred.
If beneficial ownership does transfer on the collateral, then the transaction will be subject to CGT as if the collateral has been disposed of, for the market value in sterlings of the tokens received, with gain or loss computed on the disposal of the collateral as normal. When the collateral is withdrawn from the platform, this would get treated as an acquisition of that coin at that moment in time, with the value being the value in sterling of the coin at the time received.
If beneficial ownership does not transfer, then there is no CGT on the collateral. If a borrower’s position gets liquidated, then CGT would apply based on the market value of the coins at the time of liquidation and the amount of coins lost in the liquidation. HMRC provides an example of this situation within their DeFi guidance.
I’m confused, I’m providing liquidity in a pool, is this taxable?
Yes, at a minimum, income tax would apply to any coins received as a return / income – the “LP rewards”.
According to guidance issued by HMRC, whether the initial exchange of tokens for LP tokens is taxable depends on whether the liquidity provider transferred beneficial ownership of his tokens to the pool. There is no one test that will answer this question, and you should read the terms and conditions of the contract, but in a liquidity pool, it is highly likely that beneficial ownership is transferred. When you consider the risk of impermanent loss – losses due to fluctuations in the ratio of coins due to price changes, it would appear as if the pool (recipient) of the coins does have control and thus beneficial ownership of the coins. If so, then the exchange of coins (whether a single coin or a pair) for a LP token is a taxable event – the disposal of the coins traded for the LP coins would trigger a taxable disposal, with the value of the disposal being the market value in sterling of the LP token received. HMRC calls for a “just and reasonable” basis to use in apportioning the value between the coins when more than one coin is transferred into a LP.
The information presented in this guide is for educational purposes only and is not financial or investment advice.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.