Taxation of Crypto Transactions - Staking Revenue for Charities and Universities
A UK charity or university considering a foray into cryptoassets will be likely to favour cryptocurrencies that do not require the enormous computer power associated with 'mining'.
One of the most popular blockchains for NFTs and decentralised finance, Ethereum, is restructuring so as to reduce its energy consumption by 99%, with a target date of 19 September 2022 ('The Merge'). We explain the inducements given to coinholders to maintain networks such as 'Ethereum 2.0', and how they are likely to be taxed in the hands of UK charities and universities.
Ether, the second largest cryptocurrency, will soon be offered on a platform that uses far less energy than hitherto required to validate transactions on its associated blockchain, Ethereum. This will be important not only for climate change but in particular for UK charities and universities, which often have been reluctant to hold cryptoassets such as Bitcoin, or participate in contracts on the Ethereum chain, due to environmental concerns. We can expect those organisations to be more comfortable with exposure to 'post-Merge Ether', whether from a donation or investing in a crypto venture fund, from issuing NFTs or conducting computer science research.
Ethereum 2.0's energy reduction will be caused by replacing 'mining' with a mechanism for agreeing on adding transactions to the chain that requires large numbers of holders of post-Merge Ether to lock up their coins for a period of time. To incentivise holders of post-Merge Ether to do this, the platform will issue new coins as a reward for such 'staking', at an estimated rate of up to 7% p.a. in early years. This anticipated return may serve as additional inducement for charities and universities to hold post-Merge Ether or other coins that use a similar 'proof-of-stake' consensus mechanism, such as ADA (Cardano) and SOL (Solana).
How Are Coinholders Likely to Be Taxed?
Trustees and governing bodies of charitable organisations holding proof-of-stake coins, however, will wish to consider how such 'staking revenue' will be taxed in their hands. They will find that such revenue does not fall easily within any of the pigeon-holes of exempted items for charities set out in the UK tax legislation, and will consider the catch-all for small amounts of trading or miscellaneous income (subject to an annual revenue cap of £80,000 for larger charities). Also, because HMRC arguably overvalues the taxable income in sterling from reward coins (ie, at their market value upon receipt, without considering the devaluation caused to existing holdings by the inflationary issuance of new coins into a quasi-monetary system), charities and universities have more reason to shelter their staking revenue from income tax under the small trade/miscellaneous income exemption or by employing an accepted technique of mitigation.
Want to Find Out More?
Thomas Dick recently outlined proof-of-stake blockchains, and explained the earning of staking revenue and its taxation in the hands of UK charities and universities, referring to academic work on the proper measure of taxable income caused by reward coins, in Private Client Business.
This article was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in Private Client Business as Thomas Dick, "Charities Earning Staking Revenue" [2022] P.C.B. 143–156 and is reproduced by agreement with the publishers.
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