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Transferring tokens between distributed ledgers

Tokens cannot simply be transferred from the distributed ledger for one cryptoasset to the distributed ledger for a different cryptoasset. For example, a bitcoin cannot exist on the Ethereum blockchain. An effect comparable to a ‘swap� can be achieved using a smart contract and secure public address. The holder of the tokens uses a smart contract to transfer tokens to a public address that they don’t control. An equivalent amount of tokens of the second cryptoasset are transferred from a secure public address to a public address controlled by the person.

The question that arises is whether this type of transactions results in a disposal for CGT purposes (for guidance on the general interpretation of disposal see CRYPTO22100, /manual/cryptoassets-manual/crypto22100). HMRC’s view is that the answer will depend on the facts.

‘One-way� transfers

Some transfers can only go in one direction, meaning that once the transfer has been made it cannot be undone or transferred back at a future date.

An example of this can be seen with the Ethereum blockchain. Currently ether are on the Ethereum ‘mainnet� (short for main network, the main public Ethereum blockchain). Holders of ether can choose to transfer their tokens from the mainnet to a different blockchain called the ‘Beacon Chain�. The Beacon Chain blockchain is where Ethereum’s ‘Proof of Stake� will be implemented (for more information on Proof of Stake see CRYPTO10300, /manual/cryptoassets-manual/crypto10300). It will be impossible to transfer ether from the Beacon Chain to the mainnet, making transfers a one-way process only.

HMRC’s view is that TCGA92/S43 applies to this type of transaction. The allowable costs in respect of the first cryptoasset are attributed in full to the second cryptoasset. A gain or loss will accrue as normal on a subsequent disposal of the second cryptoasset.