Session 4 — Tax treatment of crypto staking rewards
REX is proud to announce a partnership with Charlton Baker, Crypto Tax experts from the UK. While this series of 5 articles specifically relates to UK tax law, parallels can be drawn with other jurisdictions. We believe it is important that investors are informed and that we have the tools and alliances to help us navigate complex tax regulations.
Welcome to part 4 of our UK Tax Series.
For easy reference check out the other parts below:
Part 1: Do I need to pay Taxes on my Crypto Profits in the UK?
Part 2: What Crypto Activity do I pay tax on in the UK?
Part 3: Am I taxed when my Rex stake comes to an end?
Part 4: Tax treatment of crypto staking rewards
Part 5 coming soon!
In our previous session, we learned that staking rewards are taxable when they are received when your stake ends. They are treated as Miscellaneous Income and subject to income tax.
If you’re a higher-rate taxpayer, that means you could lose almost half of your hard-earned Rex.
It could be worse news though.
Have you ever thought about what might happen if the price of your reward Rex significantly drops between being minted and later converted to fiat currency?
Answer — you could be on the hook for a sizeable income tax bill at the point of minting, but if you don’t convert your reward tokens to fiat currency until many months or years later, you may find the actual real-world value is significantly lower than the tax you have paid!
Let’s think this through with an example:
Thomas is employed and is a higher rate taxpayer. He trades in crypto as a casual investor.
He has heard about an amazing new token called Rex. He buys 1,000 tokens and stakes them for 222 days.
At the end of the staking period Thomas has earned 500 Rex tokens in reward for staking.
The price of a Rex token is £20 at the end of the staking period.
Based on HMRC’s guidance, Thomas will have to report Miscellaneous Income of £10,000 and pay tax of £4,000 in GBP to HMRC.
Did you know, HMRC does not accept payment of taxes in crypto, stating it is too volatile?
Thomas decides to hold his Rex tokens, but 1 year later they have significantly dropped in value, with his 500 reward tokens only being worth £1,000 now. He decides to cut his losses and sells them, converting to fiat.
Overall, Thomas has paid an income tax of £4,000 but has only realised £1,000 of income in return. That’s a 400% tax rate!!
In a fair tax system, Thomas should only pay tax on the fiat currency realised into his bank account of £1,000.
When the reward tokens are sold, any gains will then be chargeable to capital gains tax. You can also get tax relief for any losses, just like Thomas could in our example.
That’s good news right? Wrong. Because of the different tax rates in the UK, Thomas will only get back half of the income tax previously paid.
The same issue could happen with straightforward buying and selling of crypto assets if they are not converted to fiat immediately. If this all happens around the tax year end, there could be a significant cash flow disadvantage.
As with most things in life, timing is everything. The Rex University is here to help, along with its Partner like Charlton Baker.
Check out www.charltonbaker.co.uk/news-blog and filter by crypto assets for much more information and insights.