Staking Taxes: HMRC Guidance explained + Instructions [2024]

Crypto Staking is still one of the most popular ways to make money with crypto – not least due to the successful Ethereum switch to the Proof-of-Stake mechanism in 2022. For many investors, however, it is still not entirely clear what the tax implications of cryptocurrency staking in the UK are. We’re taking a closer look at the UK’s staking tax landscape, the different kinds of taxes and tax rates, and what you need to know to optimize your tax return.

This guide is part of our series UK Crypto Taxes.

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What is Staking?

Staking is a mechanism that allows cryptocurrency holders to participate actively in the blockchain network, improve its security and potentially earn rewards for doing so.

In simple terms, staking involves locking up a certain amount of cryptocurrency in a wallet or smart contract to support the network’s operations. By doing so, stakers contribute to the security and integrity of the blockchain. In return for their participation, stakers have the opportunity to receive rewards, typically in the form of additional coins or tokens.

It’s important to note that the specifics of staking can vary depending on the cryptocurrency and blockchain protocol you are staking on.

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Proof of Stake vs Proof of Work

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Staking is commonly associated with proof-of-stake (PoS) blockchains, which operate on a different consensus mechanism than the more well-known proof-of-work (PoW) blockchains like Bitcoin.

Proof of Work and Proof of Stake share the same goal: to form a consensus mechanism that ensures the integrity of information on the blockchain. The consensus mechanism is the central security element of a decentralized blockchain, ensuring trustworthiness even with unreliable nodes.

However, the two mechanisms differ fundamentally in how the rewards and incentives are structured, which affects your opportunities for participation and earning income.

Unlike Proof of Work, which utilises a resource-intensive process called mining, Proof of Stake does not require computational power to validate transactions.

In Proof-of-Stake-based cryptocurrencies, users must lock a certain portion of their coins as collateral, which is referred to as “staking.” In return, they earn the right to participate in the consensus process.

Additional financial rewards come in the form of staking rewards.

How are staking rewards taxed in the UK?

The tax treatment of staking rewards in the UK is determined by two factors: the classification of the reward as income or capital, and the nature of your staking activity.

If staking rewards are treated as income, they are subject to income tax, ranging from 20% to 45%.

If they are deemed capital gains, they are subject to capital gains tax, ranging from 10% to 20%.

Additionally, the distinction between engaging in staking as a trade or a non-trading activity can also impact the tax treatment.

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To learn more about Income Tax and Capital Gains Tax, read our guide: UK Crypto Tax Rates

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Income or capital: Decoding the HMRC guidance

The recently published HMRC DeFi guidance on lending and staking highlights that not all lending rewards, including those from staking, are automatically treated as income.

HMRC provides a non-exhaustive list of indicators to consider. However, no single factor is decisive, and the final determination will be based on a judgment call. It is likely that HMRC generally expects most rewards to be taxable as income.

Indicators for income returns:

• Return was earned by providing a service to the DeFi platform
• The extent of the return was known at the time of the agreement (e.g. 4% APY)
• Return is paid by the DeFi platform to the liquidity provider
• Return is paid periodically
• The staking period is fixed or short-term

Indicators for capital returns:

• Return is unknown and speculative at the time of the agreement
• Return is realized by disposing of a capital asset
• Return is realized from the growth in value of a capital asset by the liquidity provider
• Return is paid as a one-off payment
• The staking period is indefinite or long-term

Income Tax on staking rewards

It’s most likely that staking rewards will be taxable as income.

According to HMRC, the sterling value of the tokens received from staking will be taxable as miscellaneous income, meaning that the income rewards are subject to income tax.

However, you can deduct any allowable expenses from the income to reduce the amount chargeable.

You also benefit from your “Personal Allowance” and the “Trading and Miscellaneous Income Allowance”, which reduce your taxable income.

Read more about them here: Tax-Free Allowances for Crypto

The Income Tax rate is dependent on your income bracket, ranging from 20% to 45%.

<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">If you are a “financial trader” in cryptoassets, these rewards may be treated as trading income instead of miscellaneous income. This is determined on a case-by-case basis and depends on various factors like frequency, intention, expertise and commerciality. Read more about this topic here: Crypto Investor vs Crypto Trader.</p></div></div></div>

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Capital Gains Tax on staking rewards

When you stake your tokens by locking them up in a network, there are times when the rewards you earn may be treated as capital gains for tax reasons, based on the conditions we outlined above.

As soon as you decide to stake, there could be an immediate potential gain or loss based on what you estimate the future reward will be worth.

Once you actually receive the staking reward, you’ll need to evaluate its actual value. If the value is different from your initial estimate, this could lead to a tax event.

This process involves a legal concept known as the ‘Marren v Ingles right’, which essentially acts as a “placeholder” for your expected reward. You acquire this “right” at the moment you commence staking, and when you eventually obtain your staking reward, this “right” gets replaced by the actual reward.

The final value of this received reward determines any tax implications.

If your initial valuation was too optimistic or pessimistic, you could either end up with a capital gain or loss. Should you encounter a loss, there’s an avenue to recalibrate things, using this loss to offset any prior gains.

We’ve written a whole guide about offsetting crypto losses here: How to claim crypto losses on your tax return

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If you are a “financial trader” in cryptoassets, these rewards may be treated as trading income instead of miscellaneous income. This is determined on a case-by-case basis and depends on various factors like frequency, intention, expertise and commerciality. Read more about this topic here: Crypto Investor vs Crypto Trader.

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When is staking taxed in the UK?

When it comes to the taxation of staking in the UK, it’s important to understand that it’s not only the receipt of staking rewards that may be subject to taxation. There are other events related to staking that could have tax implications as well. These events include:

• making the tokens available for staking
• the withdrawal of the stake
• the disposal of staking rewards
  

Making the tokens available for staking

When it comes to the tax treatment of staking cryptoassets, it hinges on whether there is a transfer of beneficial ownership. This determination is typically based on the terms and conditions outlined in the staking agreement.

If there is no change in beneficial ownership, there are no tax implications arising from this aspect of the transaction. An example of this scenario is when the platform holds the tokens on behalf of the liquidity provider, acting as a trustee.

However, if there is a transfer of beneficial ownership, it results in a disposal for Capital Gains Tax (CGT) purposes.

This situation may arise when the platform has the freedom to use or sell the tokens to a third party. In most staking arrangements, the lender or liquidity provider receives new tokens from the platform.

When a disposal occurs, the lender or liquidity provider must calculate the difference between the value of the new tokens received at the time of lending or staking and the pooled average cost of acquiring the tokens that are being disposed of.

This calculation determines any gain or loss for CGT purposes.

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HMRC has announced a second consultation on DeFi and staking, specifically considering disregarding Capital Gains Tax implications from disposals of beneficial ownership through staking. If implemented, this would make the UK more appealing to crypto investors from a tax perspective compared to other countries.

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The withdrawal of the stake

When the stake is withdrawn, tax consequences may arise again based on the transfer of beneficial ownership at the start of the transaction.

If ownership was transferred, there may be tax implications. If the staking involves receiving new tokens, a disposal occurs when returning them, resulting in a CGT gain or loss calculated from the difference in value.

However, if beneficial ownership was not transferred initially, there are no tax consequences related to this aspect of the transaction.

The disposal of staking rewards

When you receive cryptoasset tokens as staking rewards, it is considered an acquisition of those tokens for the purposes of Capital Gains Tax (CGT), regardless of whether the rewards are classified as income or capital.

The CGT acquisition cost is determined by the sterling market value of the tokens at the time of receipt. It’s important to note that the acquisition of tokens itself does not trigger a CGT event.

If you later dispose of these tokens that were received as rewards, you may incur a capital gain or capital loss. This will depend on the change in value of the tokens since acquisition and the application of the share matching rules, which determine the cost to be offset against the disposal.