The vast majority of crypto transactions do not result in the realisation of ‘real currency’. This can result in 'dry’ tax charges (ie, a tax liability when no cash proceeds are realised). Many taxpayers are unaware that tax liabilities can arise in these situations. As the number of  transactions carried out in the crypto asset space is significantly more than through more traditional investment activities, this makes applying the UK tax regime to crypto assets even more challenging.

This is typically the case in decentralised finance (DeFi) arrangements. These can involve a holder loaning their crypto assets, either directly to other individuals (peer-to-peer) or indirectly through a platform and receiving a financial return. A similar activity, staking, involves holders providing their assets to a platform to pool with those of other holders, allowing the platform to perform services with the pooled assets.

At present, a taxable transaction can arise when the assets concerned are lent or staked as described above and again when the holder regains beneficial ownership of the asset.

HMRC has been consulting on alternative tax treatments, asking for views on three alternative proposals.

In its response, ICAEW noted the treatment adopted in Estonia. Estonia has embraced the digital economy in relation to all aspects of government interaction with the public. ICAEW suggested this as a model that could be adopted in the UK.

Broadly speaking, the Estonian regime does not result in a taxable transaction until the loaned/staked assets are returned to their holders, with a split between income and capital gains, depending on the nature of the return received.

ICAEW suggested that this treatment should form part of a wider crypto asset tax regime, under which only “real” returns are taxed or relieved. It notes that the current regime acts as a disincentive for businesses to set up crypto hubs in the UK. This inhibits growth, which is contrary to the government’s aims.