Are crypto ‘End of Stakes’ taxable?

The art of DeFi is becoming big business, with many people choosing to invest their money in crypto protocols that offer wallet-watering returns. There are a plethora of ways in which investors can choose to farm their crypto assets, with Certificate Of Deposit protocols being the latest trend. Such protocols allow you to buy tokens, stake them, earn rewards during the life of the stake, and have access to your principal tokens and reward tokens at the End of Stake (EOS). Whether or not the EOS generates a taxable transaction is an interesting debate (Note: HMRC released updated gudiance on 2 Feb 2022 in relation to the taxation of DeFi activity - see our article Crypto Tax for Defi - Lending and Staking). 

When we consider what is actually happening at EOS, it would be entirely reasonable to ignore any growth in value of the principal tokens until such a point in time when they are actually disposed of (e.g. sold, exchanged, used to pay for something etc). Only then, should the EOS tokens become chargeable to capital gains tax (CGT) or loss making. It should be noted that the reward tokens, according to current HMRC guidance, should be charged to income tax at the point of EOS, but these will then also be treated as a CGT transaction when they are eventually disposed of.

Stripping this back further, effectively your principal tokens have just been held, albeit burned and swapped for stake shares (the stake shares determine your rate of return in reward tokens during the life of the stake). The fact you’ve staked your tokens means your principal has appreciated more in value than simply holding in your wallet (in token volume at least), so at the point of EOS, they just become tradeable in your wallet again. Until you do anything else with the principal and reward tokens, other than just holding them in your wallet, there is no reportable CGT transaction, as there has been no transfer of value until that point. This should include re-staking your tokens in the same protocol, as all you are doing is holding them, but in a ‘staked’ position.

Some protocols understand that timing is everything when it comes to tax. The likes of HEX offer a Good Accounting Function, which allows investors to retain tokens in their staked position for a set period of time post-EOS, without charge. This should allow investors who intend to convert their tokens into fiat currency and therefore trigger a taxable event, to push any gains into the following tax year without any risk of having made a taxable gain right at the end of the existing tax year.

In some instances it is possible to end a stake early by paying a penalty, potentially causing a capital loss at the same time. The only presumed reason an investor would want to do this would be if they needed to convert their crypto to fiat immediately, regardless of the loss making position. This is the point in time at which a loss would be crystalised for CGT purposes. If the tokens are simply un-staked and are held in a wallet, at a loss, there is no loss making transaction at that point in time, the same as there is no tax transaction for tokens with gains if held in a wallet post-EOS.

As for the record keeping with all of this, as well as keeping up to date with constantly changing guidance, and tax rules and rates, a combination of good crypto accounting software and a crypto savvy advisor, should be your next steps.

Don't overlook the fact that staking rewards earned as interest are taxable at the end of stake.