FameEX Hot Topics | UK Government Requests Input on Taxing DeFi Staking and Lending Activities

The United Kingdom's HM Revenue and Customs has launched a consultation seeking feedback on a proposed new tax regime for lending and borrowing activities within decentralized finance (DeFi). The consultation, which began on April 27, will run until June 22 and invites input from a range of stakeholders, including "investors, professionals and firms engaged in DeFi activities," as well as representative bodies and think tanks. The proposed legislative changes would alter the way cryptocurrencies used in DeFi transactions are taxed, exempting them from Capital Gains Tax (CGT) events, which are usually triggered when assets are disposed of. Under the new framework, CGT would only apply when cryptocurrencies are disposed of in a non-DeFi transaction, such as selling or exchanging tokens on a centralized exchange. The proposed framework would involve the initial transfer of crypto assets from a lender to a borrower, or through a smart contract, with the borrower being obligated to return the tokens. Additionally, the lender would have the right to withdraw the same amount of tokens that were initially lent or staked.

The consultation aims to establish a framework that "better aligns" the taxation of cryptocurrency assets used in DeFi lending and staking transactions, while also making it easier for users to comply with the regulations. To reduce the administrative burden for participants, the new tax framework could treat all DeFi returns as being revenue in nature and charged to a new miscellaneous income charge specific for crypto asset transactions. This consultation is part of a five-step process, which will be followed by drafting legislation, implementing and monitoring the change, and ultimately, reviewing and evaluating it. The British government first solicited feedback on the taxation of crypto asset loans and staking within the context of DeFi in July 2022.

The proposed changes aim to simplify the administrative process, reduce costs for taxpayers participating in DeFi, and explore how the tax treatment could better reflect the economic substance of these transactions. If implemented, the changes could significantly impact the DeFi ecosystem in the UK and may set an example for other countries to establish clearer tax guidelines for DeFi activities.

In conclusion, the proposed changes to the tax treatment of DeFi staking and lending activities in the UK are a crucial step towards establishing a more coherent regulatory framework for the emerging DeFi sector. The consultation process provides an opportunity for stakeholders to contribute their views and help shape the future direction of DeFi taxation in the UK.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.