HMRC updates cryptocurrency tax guide on staking and decentralized finance

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HM Revenue and Customs (HMRC) has updated its cryptoassets tax guide to include provisions for staking and decentralized finance (DeFi).

Crypto staking is a process used to verify cryptocurrency transactions and involves committing holdings to support a blockchain network and confirm the transactions. It also allows participants to earn passive income on their holdings – your crypto also becomes a part of the process if you have staked it.

HMRC released several documents this week on the GOV.UK website, ahead of the current 2021/22 financial year ending on April 5, stating that crypto investors have to determine whether their returns fall under ‘income’ or ‘capital’.

HMRC also clarified that investors need to discern whether their “return was earned by the lender/liquidity provider or was the return realised from the capital growth of an asset owned by the lender/liquidity provider”.

HMRC notes that because of the complexity of DeFi systems, this may not always be clear, so the department gives some factors for crypto investors to look at when determining their tax status.

One of these is whether the return to be received by the lender/liquidity provider was known at the time the agreement was made.

HMRC guidance states: “If the return to be received has been agreed, for example 5% per annum, this would indicate a revenue receipt. If the return to be received is unknown and speculative (and could result in a loss from the activity), this would indicate a capital receipt.”

In addition, HMRC asks investors to look at whether their returns were paid out periodically or throughout the period of lending/staking.

It states that a one-off payment is more likely to have the nature of capital, while recurring payments are more likely to be income.

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Executives from CryptoUK, the country’s self-regulatory trade association for the industry, issued a statement following the new updates.

Executive director Ian Taylor called the new tax guidance update “inconsistent” with regulatory frameworks put forth by other authorities in the UK.

He said: “This treatment of crypto lending and staking creates an unnecessary burden for any crypto investor who will now be required to include details of any lent assets (in certain cases inaccurately determined to be ‘disposed’) on their tax returns.”

He also noted that the nature of DeFi will probably mean that investors will have to report “hundreds or even thousands of transactions.”

HMRC also said that returns made through staking and DeFi lending can’t be considered as traditional “interest” since private digital currencies are not considered legal tender in the UK.

WARNING: Nothing in this article should be read or understood to be financial and/or investment advice. Readers should take their own financial advice from a suitably qualified independent financial adviser before making any investment decisions.

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