As crypto adopters would no doubt know, staking is a lucrative process you can undertake for your excess crypto holdings. Whether you are an individual or a corporate that has assets earning staking rewards, it’s worthwhile looking into available guidelines re how they are taxed.
Staking takes place when you use crypto currency such as Eth, Solana, ADA in the validation process of transactions on a blockchain. You essentially lock up a certain amount of cryptocurrency as collateral. This process is commonly associated with proof-of-stake (PoS) and delegated proof-of-stake (DPoS) consensus mechanisms, which are alternatives to the more traditional proof-of-work (PoW) used by cryptocurrencies like Bitcoin. That’s the reason why some coins like Bitcoin doesn’t have staking available.
Think of a scenario where you have excess funds in your bank account. You’d want to put it to some use assuming you’d like to retain them in the business. Staking is comparable, when you have coins in your asset base and you don’t expect to use them, you could consider staking to earn some rewards.
There is also a process by which you place crypto assets in yield bearing accounts, that’s different to the process of staking.
By far the biggest risk is a lock-in period for your staked assets. This could be a small period of time like 5-7 working days even. In the crypto industry, big price shifts happen really fast as we are all well aware. That means you would not have your staked coins to hand to quickly swap. It would be worth considering any vesting period requirements before you start the process.
Now the real question,
There is no simple or straight forward answer here. A consultation was run by HMRC which addressed the taxation of decentralised finance (DeFi) involving the lending and staking of cryptoassets in April 2023 with results made available post June 2023.
While there are many factors considered here, it points towards the fact that if there is a determinable income earned via staking rewards, a company or holder of the asset should consider it for either income tax (corporate tax for companies) or Capital Gains Tax (CGT). CGT generally occurs when you have disposed off an asset at a higher value than you bought it for. Staking could be deemed as disposal if you no longer have ownership or control over staked coins.
Again general principle here is that, if you receive staking rewards consistently (like every month) that’s likely “income” in nature rather than “capital gains”. When we say income nature, it doesn’t classify like “revenue”. It simply means it’s a profit and loss line item (other income) rather than a Balance sheet adjustment of value held (intangible asset).
Points to consider
There is ongoing government work in this area and more clarity regarding taxes is expected. With the increasing value of most digital assets in January and February, there is renewed investor interest in activities including staking and yield generation. It’s important that you consider tax liabilities on an individual and corporate level for any activities before undertaking them with a long term view.
Disclaimer – This article is for information purposes only and this is an area still undergoing changes. Please refer to latest guidelines and consult professionals before deciding on how staking rewards should be treated for your entity.
References and notes
- https://www.blockpit.io/en-gb/tax-guides/staking-taxation#:~:text=Income%20Tax%20on%20staking%20rewards,are%20subject%20to%20income%20tax.
- https://www.dlnews.com/articles/regulation/uk-treasury-puts-out-comprehensive-crypto-reg-proposals/
- HMRC Consultation paper
