Interest in stablecoins such as Tether (USDT) and Circle (USDC) is growing. Unlike other crypto assets such as Bitcoin, stablecoins are designed to maintain a stable value.

There is more to this than meets the eye. For example, USDC and USDT are backed – or ‘pegged’ – by capital reserves intended to support and maintain the token’s value. Whereas an algorithmic stablecoin may have no assets being held in reserve. Even with a reserve, it is not a guarantee that the token will be immune from “bank runs” or maintain its value.

There is a risk of ‘de-pegging’, where the token stops tracking the value it should. Notable failures include Terra USD, which collapsed in May 2022, wiping an estimated US$50bn off the crypto market. TerraUSD was backed by an algorithm intended to increase and decrease supply to maintain value, but even USDC briefly de-pegged in March 2023.

The Financial Conduct Authority (FCA) is consulting on the regulation of stablecoins; however, the treatment of stablecoins for tax and accounting is outside the scope of regulations.

Central bank digital currencies

Stablecoins differ from Central Bank Digital Currencies (CBDCs) as the latter are government-backed. Central banks worldwide have expressed interest in creating digital versions of their own currencies. A central bank issues CBDCs, while stablecoins are issued by an entity such as Tether. The Bank of England has been researching a digital version of the pound. Globally, some other ‘digital currencies’ have been launched, such as the Sand Dollar in the Bahamas.

Accounting for stablecoins

To get to the tax treatment (for companies, at least), we need to start with the accounting treatment. According to IFRS 9, a financial asset is any asset that is:

• cash;
• an equity instrument of another entity; or
• a contractual right to receive cash or another financial asset from another entity

IFRS 9 does not define cash. However, IAS7 defines it as cash on hand, and demand deposits with banks. Stablecoins, generally, do not meet that definition as they are neither cash nor a debt with a bank.

Stablecoin also do not appear to be equity instruments of another entity and so we need to consider whether they constitute a contractual right to receive cash or another financial asset from another entity.

Financial asset?

Stablecoins may be designed to be redeemable on demand for a fixed amount of fiat currency, in which case, they could be considered financial assets under that definition. The key here is how they are backed and what, if any, terms and conditions apply.

Some stablecoins can be redeemed with the “issuer”, so there could be contractual redemption rights. However, most stablecoins do not have a redemption mechanism. They therefore appear to fail the requirements for redemption rights and are unlikely to meet the definition of a financial instrument under IFRS 9 as they don’t have a contractual right to receive cash or another asset.

Where the holder does not have contractual rights to redeem, it is also possible that, where an entity owns stablecoins for sale in the ordinary course of business, they might be classified as inventory under IAS 2. This is only appropriate under limited circumstances and will be determined by the underlying business model in which the stablecoins are owned, used and/or monetised.

In the case that the entity is not trading in stablecoins as a broker-dealer, classification as a Financial Asset or Inventory will not be appropriate. This leaves us with classification as an intangible asset under IAS 38.

However, as we’re talking crypto assets, nothing is straightforward. Even where terms and conditions exist, redemption with the stablecoin provider may not be simple. For example, the minimum transaction amount is 100,000 USDT for USDT redemption with Tether, so you may only be able to redeem them via a secondary market. This may not satisfy the requirements under IFRS 9.

In the EU, stablecoin regulation is already in force under the Markets in Crypto Assets Regulation (MiCAR). MiCAR introduces a requirement that stablecoins must be redeemable to be an Electronic Money Token (EMT). Few stablecoins can meet the requirements to be an EMT, with USDC being a notable exception. This presents an interesting challenge, as in the EU, USDC could meet the requirements under IFRS 9 as a contractual right to receive cash and further classification as a cash equivalent under IAS 7 where there is an insignificant risk to the change in value.

However, the requirements under MiCAR do not extend to UK entities. UK institutions are able to redeem UDSC directly with Circle Mint (minimum contractual redemption right of 100,000 USDC), meaning they too may meet the requirements under IFRS 9 or IAS 7. Where an institution does not hold USDC from Circle Mint but other third parties (eg, from exchanges or customers), the result would be two differing classifications for the same asset; redeemable USDC under IFRS 9 or IAS 7, and non-redeemable USDC under IAS 38.

Even if a stablecoin can qualify as a cash equivalent, there is a separate challenge under UK tax law.

Taxing stablecoins

The Taxes Acts apply certain specific provisions to money, but the meaning is never defined. In Money and the Mechanism of Exchange, Jevons defined money as a means of exchange, a store of value, and a unit of account. Arguably, stablecoins appear to meet these requirements, but your local shop generally won’t accept them, leading to the answer that stablecoins are not money for tax purposes.

Because of this, any legislation that only applies to money or transactions involving the lending of money, such as the loan relationship rules, will not be applicable. This results in the treatment for both individuals and companies being broadly the same, taxable under the chargeable gains rules (unless the taxpayer is trading in the relevant assets).

The chargeable gains position

The Taxation of Chargeable Gains Act provides that “all forms of property shall be assets for the purposes of this act, whether situated in the United Kingdom or not”. However, the law provides a specific exclusion for sterling.

Crucially, a stablecoin is not a CBDC, nor is it the same as the currency against which it is pegged. Some other limited exemptions apply, for example, when using foreign currency abroad for personal use or where there is a debt (in any currency). This means that, on the face of it, stablecoins are chargeable assets for tax purposes.

This raises the often-asked question: how do stablecoins give rise to a capital gain, as their value is meant to be stable? Most stablecoins are pegged to the US Dollar and not Sterling so stablecoin owners, in effect, become exposed to fluctuations in foreign exchange.

Chargeable gains are calculated by converting the acquisition cost of the asset to sterling at the date of acquisition and converting the value of sterling of the disposal proceeds to sterling at the time and date of the disposal, then comparing the two.

Any fluctuation of the US dollar will affect the value of a stablecoin against the pound. For example, when the value of the pound fell against the dollar on 26 September 2022, any USD stablecoins acquired before that date would be worth more. In this event, if they were disposed of at that point, they would have likely created a taxable gain.

Could stablecoins be classified as a debt?

If, and there is no HMRC guidance on this point, a stablecoin could be a debt, then the tax treatment may follow that for other simple debts and bank accounts, which are excluded for CGT purposes.

The chargeable gains position is particularly relevant for contractors within the Web3 industry who may receive USD-pegged stablecoin as remuneration for their services. Stablecoin tokens received for services are taxable as income when they are received. If these are not immediately converted to pounds upon receipt but retained indefinitely, there is an increased risk of further taxable gains linked to foreign exchange movements.