Cryptocurrencies are considered assets in the United Kingdom (UK), meaning crypto transactions will be taxed as personal income or capital gains tax. The type of tax levied on the transaction depends on its nature.
HMRC, the regulatory authority reviewing the UK’s tax regulations, considers income from staking as income taxable under income tax. The transaction’s tax treatment depends on the frequency and volume, with taxes applied as regular or miscellaneous income.
When you sell the token you earned through staking, the tax incurred on the profitable transaction will be categorised under Capital Gain Tax. But if you incur a loss while selling the token, you are not liable to pay any tax. This article will further explain the said guidelines in a more detailed manner.
Understanding Income Through Staking
Staking is like putting your crypto to work and earning rewards while helping the cryptocurrency network run smoothly. It is similar to when you lock your money in an investment scheme in a bank to earn interest on it. But in crypto, the rewards may not be guaranteed or even defined.
You will earn rewards by contributing coins through staking to maintain and protect the blockchain. Moreover, when you stake a high amount for a long term, your profits might be higher
How Is Crypto Staking Taxed In The UK?
Although crypto staking has grown in popularity among UK investors, the tax implications can be tricky. Staking rewards are taxed differently depending on their nature, whether they are classified as income or capital. Understanding how crypto staking is taxed is crucial for UK investors to avoid any unpleasant surprises come tax season. Let’s break it down for you.
Crypto Staking and Income Tax
When you receive rewards for staking your crypto assets, HMRC treats these rewards as taxable income if the activity doesn’t count as a trade. This means that the value of the staking rewards you receive will be taxed as miscellaneous income under the UK’s income tax rules. The key here is that the sterling value of your rewards when they become receivable counts as taxable income.
It’s important to keep track of the exact date when your staking rewards become available because that’s when they are assessed for tax. You can also deduct certain allowable expenses from the taxable amount, which could reduce your tax liability. If you are staking as a hobby or on a smaller scale, this is likely how your staking rewards will be taxed.
Crypto Staking and Capital Gains Tax (CGT)
For rewards that are considered capital in nature, capital gains tax (CGT) rules apply. This usually happens when the rewards are part of a more substantial staking activity or when the investor is considered a financial trader in crypto assets. When you stake your tokens, a capital gain or capital loss may be realised based on the market value at the time of staking.
If you later remove your tokens from staking and their value has increased, you’ll likely have to pay CGT on the capital gain. However, if their value has dropped, this could result in a capital loss, which may offset gains elsewhere. The key point is that whether you gain or lose, CGT comes into play both when you lock up your tokens and when you sell or dispose of your staking rewards.
When Crypto Staking Rewards are Sold
Disposing of staking rewards is treated similarly to other crypto assets for CGT purposes. This means that when you sell, trade, or spend your staking rewards, you need to calculate the capital gains or losses from the sale. The value of the staking reward when you first receive it becomes your acquisition cost, and any gains are calculated from that baseline.
HMRC’s share matching and pooling rules apply here, which means that when you dispose of your staking rewards, they are matched against the tokens you’ve acquired over time. This can affect how you calculate your CGT liability, especially if you’ve been staking a variety of tokens or have made multiple acquisitions.
Staking as a Financial Trader
In rare instances, HMRC might classify your staking activity as a form of financial trading. This could happen if you are actively involved in crypto asset trading on a professional level.
If that’s the case, the income you earn from staking would be treated as trading income rather than miscellaneous income or capital gains. The difference here is that trading income is taxed under different rules, and you may be subject to higher rates depending on your overall income.
Tokens Locked Up in Staking
A final point to consider is what happens when your tokens are locked up as part of a staking arrangement. If you lose beneficial ownership of these tokens, HMRC may view this as a disposal for CGT purposes. This means that even though you haven’t sold your tokens, you could still face a capital gains tax event based on the value of your tokens when they were first locked up compared to their acquisition cost.
Later, when you unlock your tokens, another CGT event occurs. If their value has increased while being staked, you’ll need to pay CGT on the capital gain. On the other hand, if their value has dropped, you can claim a capital loss to offset future gains. Keeping accurate records of your tokens’ value when locked and unlocked is crucial to ensure you pay the correct amount of tax.
How To Calculate Tax On Income From Staking In The UK?
Here’s how you can calculate tax on income from crypto staking in the UK:
Determine the Nature of Staking
We must determine the nature of the staking activity. If you are staking as a trade, the rewards will be taxed as trading income. The rewards will be taxed as miscellaneous income if you are staking as a non-trading activity or hobby.
Calculate Staking Rewards
Add all the rewards you earned through staking throughout the tax year. A certain amount of coins are usually added to your wallet regularly until the lock-in period of staking ends. Some staking schemes or programs also give the whole amount at the end of the staking period.
Convert to Pounds Sterling
For tax purposes in the UK, you will have to convert the value of the crypto into pounds sterling (GBP) when you receive them. Use exchange rates or cryptocurrency price data to convert it to the latest price.
Income Tax Calculation
If staking is a regular activity for you and the primary income source, it will be added to your income sources in GBP value, and you will have to pay income tax. If staking is done as a hobby/side hustle, it is categorized under miscellaneous income and taxed under income tax.
Capital Gains Tax Calculation
Now, if you plan to dispose of your crypto, which you have earned through staking, and have earned a gain, you will have to pay capital gains tax on the transaction. If you have incurred a loss on selling the crypto, you do not have to pay any taxes, and the loss can be set off or carried forward.
Real Life Scenario
Example 1: .
Manish stakes 1 Ethereum on LIDO platform and earns a staking reward of 0.1 ETH (worth £10,000) during FY 23-24. The reward received will be taxed as miscellaneous income.
The personal tax allowance in the UK is £12,570; since this income earned by Manish is less than the allowance, there is no tax liability.
Conclusion
Crypto staking can be done as a business activity or a passive income source. In both cases, you must pay either income or capital gain tax based on your staking activity. However, the manual calculation of such taxes can prove to be tedious.
Hence, to simplify this process, you can use KoinX, which takes care of all the technicalities of crypto taxes while understanding your tax obligation and swiftly filing your errorless tax reports. Sign up on KoinX now for a hassle-free tax report process.
Frequently Asked Questions
Can HMRC Track My Crypto Staking Rewards?
Yes, HMRC can track your crypto-staking rewards, especially if you use UK-based exchanges or report them on your tax returns. Many crypto exchanges share data with tax authorities, and HMRC may request this information. It’s important to accurately report your staking rewards to avoid potential penalties or investigations.
Is Crypto Farming Taxable In The UK?
Yes, crypto farming is taxable in the UK. Whether you pay Income Tax or Capital Gains Tax depends on how you receive the rewards. If the rewards are treated as income, Income Tax applies, while Capital Gains Tax applies when the rewards are considered assets and sold for a profit.
How Can You Report Crypto Staking In The UK?
In the UK, you must report your crypto-staking rewards to HMRC as part of your Self Assessment Tax Return. The nature of your rewards (either as capital gains or income) determines the correct section for reporting. If the rewards exceed £10,000 and are taxable as income, you’ll need to report it to the HMRC. For rewards under £10,000, and if you don’t usually file a return, you can contact HMRC to arrange tax collection via PAYE.
What Is Proof-of-Stake In Cryptocurrency?
Proof-of-Stake (PoS) is a consensus mechanism in cryptocurrency that allows users to validate transactions based on the number of coins they hold. Unlike Proof-of-Work, which requires significant computing power, PoS uses staking, where participants “lock up” their crypto to secure the network, earning rewards based on their holdings and participation.
