Why Ethereum (ETH) Merge Spell Tax Trouble for UK Crypto Stakers

Ethereum (ETH) holders in the UK looking to stake their crypto after the merger earlier this month could face paying a lot more in tax

After the upgrade, Ethereum converted from a proof-of-work system to a proof-of-stake one, where holders are encouraged to “stake crypto to secure the blockchain.

With a return of 5.2% by one estimate, this news is expected to bring stakes to the masses. Already, about $25.2 billion in Ethereum, roughly 12% of all eligible ETH in circulation, was locked up in staking wallets as of earlier this week, according to Staking Rewards.

The UK Inland Revenue issues DeFi guidelines

However, the UK’s HM Revenue and Customs issued guidelines earlier this year on how staking should be treated for tax purposes, updating the framework for cryptoassets to include decentralized finance (DeFi).

The new proposals have put an increased onus on investors to find out what they may have to pay, as the terms and conditions of particular platforms may dictate whether a fee must be paid.

For example, a capital gains tax could be incurred if a platform has the use of a person’s coins while they hold them, as this would indicate that the beneficial ownership of those assets has passed, thus being treated as a disposal, HMRC, the UK tax department, said.

According to experts, this is likely to happen to those who stake ETH on exchanges, because staked tokens are grouped together from multiple users.

Additionally, many users are also likely to use exchanges due to the technical expertise and necessary capital required to be a validator on the Ethereum blockchain.

Accordingly, validators running their own nodes on the blockchain are “not covered by the DeFi guidelines,” HMRC clarified.

The guidelines added that the proceeds from the stake will not be treated as interest, as crypto-assets are not considered currency or legal tender in the UK. This puts rewards from stakes under income tax, which can rise to rates as high as 45% (although the government recently announced it would cut the top rate).

Taxpayers are in for a shock

Yet this tax burden may come as a surprise to many in the UK, as UK workers do not need to file tax returns, unlike the US, unless they collect income from investments.

Consequently, there are probably many people who are not aware of the requirement to deliver returns in such cases. “One of the challenges for any tax authority is, do you get a lot of people suddenly filing a tax return that they didn’t before?” said David Wren, a tax partner at EY.

As the vast majority of employed Britons are not required to submit annual reports, the new requirements could also potentially be a massive administrative burden for the government.

Tax authorities “are going to give themselves quite a headache if they suddenly require a lot of people to file tax returns just for their crypto,” Wren said. “So it’s not just that the tax position is not great, it’s also that the administration is not good on either side.”

Tax policies could hurt the country’s crypto ambitions

Meanwhile, industry campaigners in the UK have expressed displeasure with the guidelines. As well as being “fraught with problems, burdensome and very difficult to value and enforce,” according to Ian Taylor, head of industry lobby group CryptoUK, HMRC’s initial guidelines could also threaten the country’s recent efforts to attract crypto talent.

However, the sector has expressed some optimism about a consultation the authority has since held with players in the industry on ways to improve the tax system.

“HMRC is currently analyzing the responses to the DeFi call for evidence,” the department said in a response. “A summary of responses will be published in due course along with details of next steps.”

According to recent data, over a third of those in the UK currently own cryptocurrency.

Disclaimer

All information on our website is published in good faith and for general information purposes only. Any action the reader takes on the information contained on our website is strictly at their own risk.