Adding/Removing HEX Stake Classification

[medardo]

Hello. How would you classify the transaction when staking a crypto like HEX? When you stake it, the HEX coins are lost and sent to a different wallet and Accoingting shows it as a Withdrawal. The closest classification that I think I could classify this would be “Classify as Lending” but I do not think that is correct.

When you end the stake, you receive your original stake amount plus your interest(staking rewards). On this I think I would need to change the amount of the coins received to the original amount originally sent out and then add another transaction for the rest of the coins and classify them as Staking Income.

The other option that I can think of is to classify as Ignore the Withdrawal transaction where I initially staked the coin. When I unstake the coin, modify the transaction to just the net gain amount of HEX and classify it as staking income.

Any help on how to classify this would be greatly appreciated.

Thanks

[Matt]

Yes, please see the following article

Managing Staking Transactions: Taxes and Tracking

[skyhawk]

Hi Medardo and Matt,

I too face this situation as a HEXican, but I decided to consult with a UK professional Chartered Accountant, as the consequences of getting it wrong can be very costly in HMRC penalties, fines and then paying the correct amount of tax (if it is greater). And any errors in calculation could compound over many years going forwards, leading to a nightmare of going back and correcting any mistakes.

The accountant told me that the use of the term ‘interest’ in respect to HEX staking rewards is incorrect. The UK HMRC does not recognise crypto assets as cash, so the term interest is invalid. HMRC treats HEX staking rewards as ‘miscellaneous income’.

The problem is that the taxable value of the income must be calculated in Pounds Sterling, so you have to also consider the HEX/GBP rate.

You also have to calculate the taxable income on the same frequency that it is awarded - i.e. daily for HEX stakes.

Now, because the HEX contract does not have an API, you have no choice but to manually retrieve the number of HEX gained daily, and maintain a manual spreadsheet of the HEX awarded, and convert it into GBP income using a historical HEX/GBP data source such as Coinmarketcap.

The next problem is that when you sell the HEX you have to work out the cost basis for the Capital Gains Tax calculation, and this cannot be calculated correctly by just using the transactions that happen in Metamask, that are being picked up by the Accointing software.

You can probably do all these manual income and CGT transactions using the manual template form that Accointing provides, but for me, this is a step too far, and it is not why I subscribe to Accointing. I use Accointing because it should be simple, quick and non labour intensive. Also it is just too risky to get it wrong. So I have decided that it is safer and easier to keep a spreadsheet record and let the accountant sort it out (for a substantial fee of course !).

If Accointing wishes to challenge the conclusions that my Accountant makes about the HEX staking, I am happy to put any counter arguments to him, so I would welcome any feedback.

Thanks.

[medardo]

Hi Skyhawk. The other part of this equation that may be missing is that when someone stakes HEX, the coins are destroyed. The interest/miscellaneous income is imaginary and it is not realized. The coins are minted again, included the extra interest coins, by you when you end the stake and the smart contract is executed. Technically there is no interest/miscellaneous income being earned while the staking contract is running.

It is different from other staking protocols in that way since in other protocols, the coins are not destroyed and are just held somewhere you don’t have access to until you reclaim them back when the staking ends. Not sure if this actually matters or not. I may be incorrect, but this is the way I understand how the HEX contract works. Not sure what your accountant would think of this.

[skyhawk]

Hi Medardo, I’ll be sure to run your theory by my Accountant, but it probably won’t be for a while as I’m not planning to file with HMRC for the 2021 - 2022 tax year until later on in the year, and I’m going to save all the questions for a wrap up meeting so that they can prepare my return. In the meantime I’m having to assume that it’s treated as miscellaneous income and put the appropriate amount into a separate GBP nominated bank account.

[Matt]

Here is the breakdown of classifications: Crypto Tax Classifications : Accointing AG
Here is how you are taxed per classification: https://www.accointing.com/the-hub/?s=classifications&id=3300&post_type=post