Her Majesty’s Revenue and Customs (HMRC), the UK’s tax authority, has updated its tax advice to include cryptocurrency staking—and it’s broadly similar to that given to crypto miners. If you’re a UK crypto holder, this update is relevant to you.
According to the new guidance, any taxes applied to staking activity will be determined by whether or not the staking “amounts to a taxable trade.” This, in turn, is determined by several factors that include the nature of the organization, and the commercial nature of the activity.
If staking isn’t determined to be amenable to a taxable trade, the pound sterling value of staking awards will be taxed as miscellaneous income. The HMRC guidance also adds that if the individual keeps the awarded assets, “they may have to pay Capital Gains Tax when they later dispose of them.”
What is staking?
Staking is an activity where a user holds their funds in a cryptocurrency wallet in order to participate in maintaining the operations of a proof-of-stake (PoS) blockchain.
A PoS blockchain is founded on the idea that a person can mine or validate blockchain transactions according to how many coins they hold. It is fundamentally different from proof-of-work (PoW) blockchains, which require huge amounts of energy because network members need to constantly solve arbitrary mathematical puzzles to protect the system.
And proof of stake blockchains are on the rise. Most notably, the Ethereum network—which is home to Ethereum, Bitcoin’s longstanding rival cryptocurrency—is switching over to a PoS system with the long-awaited Ethereum 2.0 upgrade. Eth 2 is expected to address the network’s historical issues with scalability—where transactions take a long time to clear, and user experience suffers.