Whilst investment and trading in cryptocurrency is most common, there are several areas within cryptocurrency that may generate income, for which it is important to be aware of the tax implications of.
These are:
- Staking
- Forking
- Airdrops
Staking
Staking involves using cryptocurrency as a method of generating passive income (very similar to earning interest on cash). Staking is only available on certain coins, and can only be done on certain platforms.
Any staking income received is taxable as other income, so is liable to tax at the income tax rates at 20/40/45%. If an individual was to make a business of investing into staking cryptocurrency, the income will be taxable as trading income, and will be liable to income tax and national insurance.
Forking
Forking occurs where there is a change or update to a specific blockchain. Forking can either be done via a ‘hard fork’ or a ‘soft fork’ and the tax implications for each are different.
A ‘soft fork’ occurs where there is an update to the blockchain, but no split to the chain so no new coins are created. Where a soft fork occurs, there are no tax implications as there is no changes to the blockchain, and no additional coins are received.
A ‘hard fork’ occurs where there is a change to the blockchain, so a new blockchain is created (eg. fork of bitcoin into bitcoin cash). As a result, the individual will now hold a new coin.
There is no immediate tax payable on the new coins received on a hard fork, and there will only be capital gains tax payable once they are sold. The base cost for the new coin will be a proportion of the base cost of the original coin forked from, which will be calculated using open market value on the date the coin was received.
Airdrops
An airdrop is where free tokens are received usually as part of a marketing campaign, or for an individual holding certain coins. Airdrops can also be received by an individual signing up for a specific airdrop.
The airdropped token will be a new cryptocurrency, which operates independtly.
If the airdrop is provided to an individual in exchange for, or in expectation of a service, the fair market value of the airdrop at the date of receipt will be taxable as other income for the individual, so will be taxable at the income tax rates.
If an airdrop is received with nothing expected in return, there will be no tax consequences as a result of receiving the airdrop.
When the airdropped token is eventually sold, a gain will arise regardless of whether or not the airdrop was liable to income tax when received, and the gain will be liable to capital gains tax.
Related blogs in this series:
Cryptocurrencies part 1: The Basics
Cryptocurrencies part 2: Trading and Mining Cryptocurrency
For further guidance on cryptocurrencies and their tax implications:
Before going any further, businesses and entrepreneurs should understand how cryptocurrencies are taxed, the tax guidance from HMRC, and key developments in the crypto tools that may impact how you invest.
For further guidance, please get in touch or contact your usual MHA advisor.
