Is crypto cashback taxable?

Today we’re exploring the world of Crypto cashback and asking Recap to outline the tax implications of this emerging rewards system now being offered by some exchanges. If you’re using a crypto-cashback card, or you are thinking of getting one, this article is for you!

What is crypto cashback?

Some large crypto providers like Binance, Coinbase, and Crypto.com have started to offer rewards to their users for using their crypto cards to make purchases. These cards are like a regular debit card and can be used to make purchases in most retailers providing rewards for qualifying purchases.

Cashback typically takes the form of a percentage return on purchases paid in crypto. For example if my card offers 4% back in CRO token and I spend £100 - I will receive £4 worth of CRO as a reward for qualifying spends.

Users will normally need to add funds to their card before making a purchase via their exchange or wallet.

Tax treatment for cashback

There’s no specific HMRC guidance on the tax treatment of cash back rewards received in crypto assets, however there’s guidance¹ on the receipt of cashback in general and this is likely to apply.

HMRC state:

"A sum, however described, which is received by an ordinary retail customer as consideration for the purchase by the customer of goods or services should not be regarded as a taxable receipt in computing profits under Case VI. This is the case whether the payer is the provider of the goods or services or another party with an economic interest in ensuring the transaction takes place."

Assuming this guidance is also applied to crypto asset cash back rewards then they shouldn’t be treated as taxable income where they aren’t received in the course of a trade. Good news for card users! However, you still need records of the receipt for when you sell the assets in the future

Disposing of crypto cashback rewards

If a cashback user later decides to swap their crypto rewards for other types of crypto or fiat currency, they’ll be making a taxable disposal and possibly an acquisition. In this case, capital gains tax rules will apply - we've provided lots more information on the specifics of crypto mining tax, as this is slightly different.

In order to calculate the capital gains tax owed, we first need to know the cost basis of the assets being disposed of. There’s no HMRC guidance on the acquisition cost of non-taxable airdrops, therefore this remains an area of uncertainty.

The worst case (for taxpayers) would be to assume the acquisition cost of the assets was Nil. For example, if I receive 100 CRO as a reward and then swap this for £20 GBP I would pay capital gains tax on £20 - £0 = £20.

On the other hand, you could argue that the cost-basis for airdropped rewards should be the fair market value of the reward at the time it was received. For example, if I receive 100 CRO (valued at the time of receipt at £10) and later swap this for £20 GBP, I would pay capital gains tax on £20 - £10 = £10.

Please remember - this article isn’t tax advice. For a more comprehensive overview of crypto cashback and other types of crypto transactions see, Recap’s comprehensive UK crypto tax guide. Alternatively, explore more insights on this ever-growing investment style with our guide on paying UK crypto tax, our DeFi tax guide and our guide on tax for crypto airdrops.

Author: David Collins is Head of Growth at crypto tax calculation service Recap. 

References:

1. https://www.gov.uk/government/publications/statement-of-practice-4-1997/statement-of-practice-4-1997
2. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim100210