Staking and HMRC tax treatment

[dingdong]

I'm a bit perplexed by staking and the tax treatment - in particular what happens when you unstake.

I think the situation is:

- At the point you decide to stake = a disposal event which needs to be considered for CGT
- Anything you earn whilst staking = income to be reported as interest

What happens when you later unstake? Is that then considered another disposal event, and any gain/loss on tokens from the start of staking would be subject to CGT again (including the original starting balance)

It seems odd to have anything considered as interest given the coin might crash in value so you'd never actually receive the amount of 'interest' received, and you'd then also be paying CGT as well for the same transaction?

Or is there no additional CGT for the staking period and the unstaking just becomes a new acquisition date and value for CGT going forward?

[Bubblesofearth]

I'm a bit perplexed by staking and the tax treatment - in particular what happens when you unstake.

I think the situation is:

- At the point you decide to stake = a disposal event which needs to be considered for CGT
- Anything you earn whilst staking = income to be reported as interest

What happens when you later unstake? Is that then considered another disposal event, and any gain/loss on tokens from the start of staking would be subject to CGT again (including the original starting balance)

It seems odd to have anything considered as interest given the coin might crash in value so you'd never actually receive the amount of 'interest' received, and you'd then also be paying CGT as well for the same transaction?

Or is there no additional CGT for the staking period and the unstaking just becomes a new acquisition date and value for CGT going forward?

.

What's staking mean in this context? Is this some new cryptocurrency language (is unstaking a new word cos I'm getting a red line under it) to make that world even more obscure than it already is?

BoE

[DrFfybes]

What's staking mean in this context? Is this some new cryptocurrency language (is unstaking a new word cos I'm getting a red line under it) to make that world even more obscure than it already is?

BoE

Apparently so

https://www.google.com/search?q=staking

[mc2fool]

Start here: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto20000

Note particularly here: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto21200

CRYPTO21200 - Cryptoassets for individuals: Income Tax: staking

Some types of consensus require the ‘staking’ of exchange tokens which weights the entitlement to newly forged tokens, as is explained at CRYPTO10300.

Whether such activity amounts to a taxable trade (with the tokens as trade receipts) depends on a range of factors such as:

degree of activity
organisation
risk
commerciality

If the activity does not amount to a trade, the pound sterling value (at the time of receipt) of any tokens awarded will be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.

[Bubblesofearth]

Start here: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto20000

Note particularly here: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto21200

CRYPTO21200 - Cryptoassets for individuals: Income Tax: staking

Some types of consensus require the ‘staking’ of exchange tokens which weights the entitlement to newly forged tokens, as is explained at CRYPTO10300.

Whether such activity amounts to a taxable trade (with the tokens as trade receipts) depends on a range of factors such as:

degree of activity
organisation
risk
commerciality

If the activity does not amount to a trade, the pound sterling value (at the time of receipt) of any tokens awarded will be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.

Had a quick look but then gave up. I think I'm simply too old or stupid to wrap my head around it all. Simplest just to avoid entirely.

BoE

[mc2fool]

Had a quick look but then gave up. I think I'm simply too old or stupid to wrap my head around it all. Simplest just to avoid entirely.

LOL! Well don't ask me to explain it, this was the first I'd ever heard of "staking" too! But I figured the HMRC manuals must have a section on it so took a look, and lo and behold.

If the OP wants to google "staking HMRC" there seems to be quite a number of less, ummm, cryptic ( ) articles on the matter but as I know next to nothing on the matter (and don't have the inclination to learn) I can't at-a-glance tell which are likely to be useful or not, so decided just to post the "horses mouth" info....

[Urbandreamer]

What's staking mean in this context? Is this some new cryptocurrency language (is unstaking a new word cos I'm getting a red line under it) to make that world even more obscure than it already is?

BoE

Well, it's an attempt to pick a word for one or more concepts that isn't widely used outside of crypto.

Consider the stock market, in particular shares that are non too liquid.

You can trade them, because there is a market maker. The MM has to buy and sell these shares that they don't really want to invest in, but in return they make money on the spread.

Clearly only wealthy firms or individuals can act in this way and benefit from the spreads. Of course it's not a zero sum game, the retail investor gets to buy or sell these share, because of the MM supplying liquidity.

Now consider, what if this liquidity could be outsourced to lots of retail owners of such shares. They "stake" their shares to be sold and repurchased. In return they get some of the spread. That's one use of the term "staking" in crypto.

The other is the one that you are having trouble with. Some crypto like Eth rely upon validators to regulate transactions/trade/contracts. To be a validator you need to control significant amounts of, in this case Eth. One method is to get others to give control of their Eth (stake) to you. In return you pay them in Eth.

I should point out that the FCA REALLY doesn't like these concepts and that officially firms offering such services are not supposed to offer them to UK citizens (retail "investors"). However that doesn't stop HMRC expecting to tax such citizens actions.

I too am dubious about staking and have never done so.

If you want really obscure, try to explain the trad-fi (traditional finance) terms backwardation or contango, why they exists and why it might happen. Oh and I'm getting a red underline on those words. Doesn't mean that a word isn't used or exists.
https://www.investopedia.com/articles/0 ... dation.asp

[Bubblesofearth]

If you want really obscure, try to explain the trad-fi (traditional finance) terms backwardation or contango, why they exists and why it might happen. Oh and I'm getting a red underline on those words. Doesn't mean that a word isn't used or exists.
https://www.investopedia.com/articles/0 ... dation.asp

Funnily enough I'm clear on backwardation and contango probably because I've traded commodities in the past.

I guess maybe it comes down to what you are familiar with from a trading/investment pov.

BoE

[bluedonkey]

Contango takes me back to a time of fortnightly accounts with stockbrokers.

[dingdong]

Glad to see I'm not the only one to find it confusing!

I have basically staked my cosmos balance on Kraken as the 15% interest rate was worth experimenting with and taking a risk for (essentially lending your coins to the exchange)

Unstaking means you are basically retrieving your coins (now including the added 'interest') so they are back in your wallet and no longer earning any interest.

To me it makes more sense for all of that to be considered as a capital gain or loss when you eventually sell your stake in that coin, but I'll plough through the HMRC guidance and see if it covers the unstaking scenario.

[murraypaul]

That sounds like 'deposit', 'earn interest', 'withdraw', so would be income tax?

[dingdong]

It does but the difference is that the interest is added in the form of coins to your coin balance which obviously then fluctuates in value.

In the worst case you could pay tax on an interest amount only for the coin to crash to zero before you withdrew that interest.
You'd then have no comeback to reclaim that tax.

I guess the HMRC philosophy is that you are considered to have cashed in any interest when the coins were distributed and have then reinvested it, which i suppose on thinking about it is no different to a shares account that uses dividend reinvestment....assuming you had very high risk shares

[mc2fool]

It does but the difference is that the interest is added in the form of coins to your coin balance which obviously then fluctuates in value.

In the worst case you could pay tax on an interest amount only for the coin to crash to zero before you withdrew that interest.
You'd then have no comeback to reclaim that tax.

I guess the HMRC philosophy is that you are considered to have cashed in any interest when the coins were distributed and have then reinvested it, which i suppose on thinking about it is no different to a shares account that uses dividend reinvestment....assuming you had very high risk shares

And, perhaps more directly, no different to receiving foreign currency income. You are required to declare its £ sterling value at the time you received it, not at the time you (if ever) convert it to £.

[SebsCat]

It does but the difference is that the interest is added in the form of coins to your coin balance which obviously then fluctuates in value.

In the worst case you could pay tax on an interest amount only for the coin to crash to zero before you withdrew that interest.
You'd then have no comeback to reclaim that tax.

That's essentially what happens with people who take scrip dividends. The value of the dividend is taxed as income even though no cash is received and the scrip shares may ultimately end up worthless.

[mjbdreamer]

In my experience -

Staking protocols require that you give up your crypto in exchange for shares. The shares attract interest in the form of more shares at some attractive rate, accrued daily. You stake for a defined period. At the end of the period you close your stake and the shares are converted/swapped for the token you had at the start but now you will have benefitted from the interest AND you will benefit from the price of the original crypto rising (or falling of course) and you will benefit from other mechanisms that increase the value of shares (e.g. people forgetting to end their stake at the end date get penalised, people ending stakes early get penalised).


Finding an accountant who understands the topic is nigh on impossible but Charlton-Baker in Devizes know this topic well, they have some stuff on the website or just contact the boss there who invests in crypto to ensure he stays current and knowledgeable on the topic. Not supposed to be an advert but these are the only guys I found to be useful.