UK Tax Authorities Muddy the Crypto Tax Waters

At the start of February, government tax updates continue to hit the crypto news wires. The U.S, Thailand and India have recently been in the news, as governments pay greater attention to digital assets.

The U.S, Thailand, and India Take Different Positions on Digital Assets

This week, the Indian government announced plans to roll out a 30% crypto tax. The news of the imminent taxation of cryptos led to a surge in crypto trading in the country. Market reaction to the news suggested that the investors were maneuvering ahead of the rollout rather than considering the tax a positive.

By contrast, the Thai government withdrew plans for a 15% crypto tax in the week.

For the U.S government and U.S crypto investors, there was also good news this week. A claim in favor of Proof-of-Stake (PoS) token holders in Nashville suggests a change in tax rules for the crypto market. If the latest IRS decision is anything to go by, crypto stakers and Proof-of-Stake miners will be tax exempt.

With tax the hot topic this week, UK tax authorities announced new rules on DeFi lending and crypto staking.

The Latest from the UK’s HMRC

News hit the wires this week of the UK’s tax authority, Her Majesty’s Revenue and Customs (HMRC), new guidance on DeFi tax laws.

According to the new guidelines, the HMRC focus was on DeFi lending and staking.  The HMRC notes that “The nature of the return received by the lender/liquidity provider will depend on how the transaction is structured”.

Due to the evolving nature of the DeFi space, the HMRC laid out some guiding principles. Investors will need to determine whether the return has the nature of income or the nature of capital. According to the guidelines, the question is whether the “return was earned by the lender/liquidity provider or was the return realized from the capital growth of an asset owned by the lender/liquidity provider”.

For further assistance, the HMRC provided the following factors to assist in determining the above:

• Where a lender/liquid provider is aware of the return at the time of agreement, this is a revenue receipt.
• By contrast, if the return is unknown and speculative, this would be a capital receipt.
• A realized return through the disposal of a capital asset is a capital receipt.
• By contrast, if  the borrower/DeFi lending platform pays the return to the lender/liquidity provider, this would indicate a revenue receipt.
• One off payments are more likely to have the nature of capital, while recurring payments are more likely to have the nature of income.
• Another consideration is the whether the period of lending is fixed or indefinite, short-term or long-term.

Current UK Tax Rates

From UK tax payers, the difference in taxation is significant. Capital gains tax is 20% for gains from “other chargeable assets”. The calculation does depend, however, on tax relief, personal allowances and actual income. Tax on revenue receipts varies by income. According to the UK government website, the base rate for revenue tax is 20% applied to income between £12,570 and £50,270. On incomes of between £50,271 and £150,000, there is a tax rate of 40%. For over £150,000, the tax rate is 45%.

For investors that stake crypto and then sell their crypto, there could also be double taxation. It would be similar to rental income from a residential property and capital gains applied to the sale of said property.