UK Takes Significant Step Forward with Proposed DeFi Tax Overhaul

The UK has introduced a new tax framework aimed at alleviating the financial responsibilities of users engaged in decentralized finance (DeFi). This framework proposes deferring capital gains taxes on activities such as crypto lending and liquidity pool usage until the underlying tokens are sold, a move that has been well-received by the local industry.

Key Takeaways

The UK is proposing a new DeFi tax framework aimed at easing the tax responsibilities of users.
HMRC's "no gain, no loss" approach would defer taxes until the sale of underlying tokens.
The proposed changes are still under evaluation and not finalized, pending further discussions with stakeholders.

UK takes ‘meaningful step forward’ with proposed DeFi tax overhaul

HM Revenue and Customs (HMRC) suggested a “no gain, no loss” approach for DeFi activities, applicable to situations where a token is lent and the same type is returned, borrowing agreements, and the movement of tokens into liquidity pools. Under the proposal, taxable gains or losses would be assessed only when liquidity tokens are redeemed, based on the number of tokens received compared to what was initially contributed.

Currently, depositing funds into a DeFi protocol may incur capital gains tax, irrespective of the purpose behind the deposit. In the UK, the capital gains tax rates range between 18% to 32%, varying based on the specific transaction.

Positive Signal for UK Crypto Regulation

Sian Morton, marketing lead at the crosschain payment system Relay protocol, expressed that HMRC’s "no gain, no loss" stance represents a “meaningful step forward for UK DeFi users who utilize stablecoins as collateral against their crypto holdings.” This shift is aligned with the realistic economic nature of these financial activities.

Morton described the move as a positive indication of the UK’s evolving approach to cryptocurrency regulation.

Maria Riivari, an attorney at the DeFi platform Aave, commented that this initiative would provide clarity, ensuring that DeFi transactions won’t trigger taxes until tokens are actually sold. She encouraged other nations grappling with similar concerns to observe HMRC’s methodology and the thorough research behind it.

Source: Maria Riivari

Aave's CEO, Stani Kulechov, noted that the proposal can be viewed as “a significant win for UK DeFi users who desire to borrow stablecoins against their crypto collateral.”

Related: Switzerland Delays Crypto Tax Information Sharing Until 2027

Proposed Changes Still Under Evaluation

Despite the positive reception, this proposal has not been finalized. HMRC indicated it will continue discussions with relevant stakeholders to evaluate the merits of this proposed approach and the necessity of legislative changes regarding the taxation of crypto asset loans and liquidity pools.

The agency emphasized that it aims to ensure that the framework encompasses the variety of transactions possible under these arrangements and remains practical for compliance by individuals.

In the preliminary consultation phase, 32 formal written responses came from various stakeholders, including individuals, businesses, tax professionals, and representative organizations. Notable contributors included the cryptocurrency exchange Binance, venture capital firm a16z Capital Management, and the self-regulating trade body Crypto UK.