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 Income From Staking Taxed In The UK?
According to the taxation rules given by HMRC, gains from staking are treated as income.
Hence, interests earned from staking cryptocurrency are taxed as income, liable to income tax
If the proof of stake activity amounts to a ‘financial trader,’ these rewards may be treated as trading income rather than miscellaneous income attracting income tax.
HMRC confirms that where proof of stake activity does not amount to a trade, the sterling value (at the time of receipt) of any tokens received from staking will be taxable as miscellaneous income subject to income tax, with any allowable expenses reducing the amount chargeable.
If the token received as a reward is spent, sold, exchanged or disposed of in any manner, it will be liable to capital gain tax on the gains earned on such disposal.
How To Calculate Tax On Income From 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.
Taxable Income= FMV
FMV (fair market value of earned staking rewards)
- 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.
Capital Gain = Disposal price – Cost basis
Cost basis = Cost of the Crypto + Allowable Expense (like transaction fee)
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.
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.