Posted by Martin Bartlam and Chris Whittaker on 6 April 2021
Tagged to Cryptoassets, Cryptocurrencies, HMRC, Tax

On 30 March 2021, Her Majesty’s Revenue & Customs (HMRC) updated its Cryptoassets Manual to take into account staking in proof-of-stake networks.

HMRC confirmed that such passively earned cryptoassets will likely be subject to Capital Gains Tax or Corporation Tax on chargeable gains when the cryptoassets are subsequently sold. This position is largely the same as the established tax treatment of cryptoasset mining activities.

Staking cryptoassets

The “staking” of cryptoassets in proof-of-stake networks allows the cryptoasset holder to “stake” - meaning allocate - their cryptoasset holdings to produce and validate new blocks in the relevant blockchain. This involves locking up their cryptoassets so they can be randomly selected by the protocol at specific intervals to create a new block. Usually, the larger the amount staked, the higher the chance at being chosen as the next block validator.

What this means for cryptoasset holders is that they are able to earn passive income on their staked cryptoassets. Generally, the more staked, the higher the reward of new cryptoassets. It is hoped that the development of passive income in the cryptoasset asset class may encourage global asset managers, with a focus on passive returns, to invest in proof-of-stake cryptoasset networks.

Unlike other chains where a substantial investment in hardware is required for mining, the staking of cryptoassets can typically be undertaken simply via nomination in the user’s digital wallet. Some exchanges, such as Coinbase, allow their users to stake fractionalised Ether for the validation of the Ethereum 2.0 upgrade.

HMRC guidance  

The HMRC guidance provides that the tax treatment of staking will depend on whether this activity amounts to a taxable trade. This will depend on a range of factors such as:

  • degree of activity;
  • organisation;
  • risk; and/or
  • commerciality.

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

Importantly, if the staker subsequently sells the awarded cryptoassets, they may have to pay Capital Gains Tax or Corporation Tax on Chargeable Gains at that time.

If the activity does amount to a trade, any profits must be calculated according to the relevant tax rules. With regard to individuals, HMRC deems that “only in exceptional circumstances” would it 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.

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