Introduction
Stablecoins have emerged as a vital component of the cryptocurrency ecosystem, offering price stability in an otherwise volatile market. These digital assets are typically pegged to fiat currencies, commodities, or other assets, making them an attractive choice for traders, investors, and those seeking a reliable store of value.
In the UK, stablecoins are subject to capital gains tax (CGT) and income tax, just like other cryptoassets. Additionally, the Financial Services and Markets Act 2023 has introduced new regulations, bringing stablecoins under the scope of payments legislation, which may further influence their adoption and tax treatment.
This guide explains how stablecoins work, their different types, and how they are taxed in the UK.
What Are Stablecoins?
Stablecoins are a category of cryptocurrency designed to maintain a steady value relative to a specific asset. Unlike highly volatile assets like Bitcoin or Ethereum, stablecoins aim to provide price predictability while retaining the benefits of digital currency.
Types of Stablecoins
There are four primary types of stablecoins, each with a different mechanism to maintain price stability:
- Fiat-Backed Stablecoins
- Pegged to traditional fiat currencies like USD or GBP.
- Backed by reserves held by a central entity.
- Examples: Tether (USDT), USD Coin (USDC), Gemini Dollar (GUSD).
- Commodity-Backed Stablecoins
- Backed by physical assets like gold, silver, or real estate.
- Offers an easier way to invest in commodities.
- Examples: Paxos Gold (PAXG), Silver Token (SLVT).
- Crypto-Backed Stablecoins
- Pegged to other cryptocurrencies, requiring collateralization.
- Often over-collateralized to account for crypto volatility.
- Examples: DAI (backed by ETH, wBTC, and BAT).
- Algorithmic Stablecoins
- Maintain stability through automated supply adjustments.
- Do not require collateral but rely on market dynamics.
- Examples: Ampleforth (AMPL).
Stablecoins play a crucial role in decentralized finance (DeFi) by facilitating lending, borrowing, and trading with minimal price fluctuation. However, despite their stability, they are still subject to taxation.
How Are Stablecoins Taxed in the UK?
1. Capital Gains Tax (CGT) on Stablecoins
Every time a stablecoin is disposed of, a capital gain or loss occurs. While stablecoins are designed to maintain a steady price, small fluctuations may result in taxable events under UK law.
Taxable Disposal Events Include:
- Selling stablecoins for fiat currency (GBP, USD, etc.).
- Swapping stablecoins for another cryptocurrency.
- Using stablecoins to purchase goods or services.
- Gifting stablecoins (unless to a spouse or civil partner).
Example of a CGT Calculation:
- You purchase 1,000 USDT for £800.
- You later swap them for another cryptocurrency when 1,000 USDT = £810.
- Your capital gain is £10 (disposal proceeds - acquisition cost).
If total gains exceed the £6,000 CGT allowance (2023/24 tax year), tax rates apply:
- Basic Rate Taxpayers: 10%
- Higher/Additional Rate Taxpayers: 20%
Given that stablecoins experience minimal price fluctuations, CGT liabilities are usually small but still require accurate record-keeping for compliance.
2. Income Tax on Stablecoins
Certain earnings from stablecoins are treated as income and taxed at your regular income tax rate.
Stablecoin Income Tax Applies To:
- Staking rewards received in stablecoins.
- Liquidity pool rewards from DeFi platforms.
- Lending rewards for providing stablecoin liquidity.
The taxable amount is based on the GBP market value at the time of receipt and must be reported as miscellaneous income on the Self Assessment tax return.
Income Tax Rates for 2023/24:
- Basic Rate (Up to £50,270): 20%
- Higher Rate (£50,271 - £125,140): 40%
- Additional Rate (£125,141+): 45%
How to Calculate Stablecoin Taxes
To ensure compliance with HMRC, keeping detailed transaction records is essential. This includes:
- Dates of transactions.
- Acquisition and disposal values in GBP.
- Wallet and exchange details.
While stablecoin gains and losses are often small, every disposal is a taxable event, making accurate tax calculations necessary.
Conclusion
Stablecoins provide price stability but remain subject to capital gains tax and income tax under HMRC guidelines. Although gains from stablecoin transactions may be minimal, it is crucial to track, report, and comply with tax obligations.
Block3 Finance helps crypto investors navigate stablecoin taxation, ensuring accurate reporting and compliance with UK tax laws.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
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