Cryptoassets consultation gives hope for greater clarity on tax treatment

The Chartered Institute of Taxation (CIOT) has welcomed the launch of a consultation which offers the prospect of greater clarity on the capital gains tax (CGT) treatment of Decentralised-Finance (De-Fi) lending and staking services for cryptoassets.

Under proposals¹ contained within a consultation document launched on Tax Administration and Maintenance Day (27 April), the government will produce a fresh set of legislation tailored toward the lending and ‘staking’ of cryptoassets on De-Fi platforms.

Currently, the law would treat many of these transactions as being chargeable disposals for CGT, despite the owner not having actually disposed of their interest in the assets. The proposed new approach recognises the reality of this – that the owner retains an economic interest in their asset. The proposals are to disregard CGT on De-Fi transactions and only apply the tax once the asset is fully disposed of.

Returns received as a form of interest, whilst the asset is in the De-Fi platform, will be taxed as revenue and chargeable under a new ‘miscellaneous’ heading specifically aimed at cryptoassets. Currently, such returns could be taxed either as capital or as revenue, depending on the nature of the transaction.

Gary Ashford, Deputy President of the CIOT, said:

“The taxation of cryptoassets is a real headache for the government, with issues around both the clarity of the rules and low levels of awareness among taxpayers about their obligations.

“So it is encouraging to read these proposals. They are in line with what we have been calling for² which is for cryptoassets to be recognised as unique, requiring a specific and clear set of legislation for their taxation.

“Of the three options originally put forward in the government’s 2022 consultation, option two (to produce new legislation for De-Fi transactions) offers the best chance of clarification and ease of administration in compliance. The first option (to treat crypto assets akin to shares within the ‘repo and stock’ rules) and third (to apply a no-gain/no-loss treatment to De-Fi transactions), whilst helping remove the anomaly of charging CGT for effective non-disposals, would do nothing to help asset holders and their agents with the reporting requirements – which can be very difficult given the number of transactions involved.

“I am also pleased to read that HMRC are proposing to tax the De-Fi return received by owners whilst their asset is on the platform, as income. This not only reflects the reality of what the owner is receiving, but it puts to rest the old question of whether this return is revenue or capital. To decide this, case law needs to be looked at to determine the nature of the asset and the intentions of the owner; but those cases, some of them very old, concern conventional tangible assets rather than cryptoassets and their unique nature.

“But whatever the rules on taxing cryptoassets, government needs to work hard to raise awareness among owners of crypto of their obligations on both tax payment and reporting.”