UK Tax Authority Seeks DeFi Tax Changes

Key takeaways

• A new tax system for staking and lending on decentralised protocols is being developed in the UK.

• The suggested structure would also be utilised by independent cryptocurrency lending and staking platforms.

The UK government has started a consultation in which it is looking for suggestions on how to tax categorise DeFi lending and staking. This has been done to lessen the administrative workload on users and to more accurately reflect the financial basis of crypto assets.

According to a document the government published on Thursday, April 27, 2023, the consultation aims to get feedback from the general public on how tax regulations might be changed to accommodate lending and staking connected to crypto assets.

The consultation’s goal is to contribute to the creation of a cryptocurrency tax system in the UK where taxation on DeFi lending and staking “better corresponds to the fundamental economic substance, while reducing the administrative burden on users,” according to a statement from the HM Treasury.

If digital assets are utilised in DeFi transactions, the disposition would no longer be regarded as a disposal for tax purposes. Instead, once the cryptocurrencies are financially sold off through a transaction that is unrelated to DeFi, a taxable disposition will take place. 

To reduce administrative difficulties, the new framework might also classify all DeFi returns as revenue, subject to a new miscellaneous income levy. The proposed adjustments pertain to both centralised finance (CeFi) and DeFi lending and staking.

The eight-week consultation process for the suggested adjustments will end on June 22. Before making any modifications, HMRC is looking for the general public’s opinions on the subject. Meetings with interested parties to address the problems brought up in this consultation are something HMRC will take into consideration. This action is a component of broader UK measures to control the cryptocurrency industry and guarantee that tax laws are being effectively applied.

The U.K. recently introduced a rule requiring its citizens to report the value of their cryptocurrency holdings starting in the tax year after that, which continues through April 2025.

Notably, users of third-party platforms would also be affected by the consultation. The lending and staking of cryptoassets that is carried out through an intermediary is also expected to fall under the proposed tax system described below, according to the Treasury.