UK Tax Authority Proposes Changes to Treatment of DeFi Lending, Staking

The proposal, now open for public consultation, will also apply to crypto lending and staking through intermediaries, the authority said.

AccessTimeIconApr 27, 2023 at 1:45 p.m. UTC
Updated Apr 27, 2023 at 3:28 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

The U.K.'s tax authority is seeking public views on a proposed change to the tax treatment of decentralized finance (DeFi) lending and staking, according to a Thursday announcement.

HM Revenue and Customs' (HMRC) proposal follows a 2022 call for evidence. The authority cited recent crypto market failures, including the collapse of the FTX exchange, as cause for regulators' heightened interest in the sector.

Regulators around the world have cast their eyes on DeFi, and policymakers have "highlighted specific risks including cyber risks and other technical risks, as well as increased dependencies between traditional and decentralized financial systems and a lack of backstops in periods of market stress," HMRC said.

Under existing rules, DeFi transactions can be treated as disposals to be written off as gifts or sales by lenders or liquidity providers even in cases where ownership of the asset doesn't change.

"This can lead to tax outcomes that do not reflect the underlying economic substance, and to a tax liability from a transaction where no gain has been realized in a form which can be used to meet the liability," according to the consultation document. "The need to determine and record the market value of assets at each step in the transaction may also give rise to a disproportionate administrative burden."

The proposed changes would ensure DeFi transactions are not treated as a disposals for tax purposes. That would occur only when crypto assets are "economically disposed of in a non-DeFi transaction," the consultation said.

The new framework could also end up treating "all DeFi returns as being revenue in nature," and subject to a "new miscellaneous income charge," to avoid administrative burdens.

Though the proposed framework is targeting DeFi lending and staking, it is also intended to apply for centralized finance (CeFi), where crypto lending or staking is conducted through intermediaries, the document said.

The HMRC has previously extended existing tax rules to crypto, including a tax break for foreign investors purchasing crypto through local agents.

The consultation is open for eight weeks and closes on June 22.

UPDATE (April 27, 13:55): Adds details starting in fourth paragraph.

Edited by Sheldon Reback.


Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Sandali Handagama

Sandali Handagama is CoinDesk's deputy managing editor for policy and regulations, EMEA. She does not own any crypto.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.