FameEX Hot Topics | UK Government Seeks Feedback on Taxation of DeFi Staking and Lending

The United Kingdom's HM Revenue and Customs is seeking input on a new tax regime for decentralized finance (DeFi) lending and borrowing activities. The consultation, which was launched on April 27, will run until June 22 and invites input from "investors, professionals and firms engaged in DeFi activities," as well as representative bodies and think tanks. The proposed legislative changes would see cryptocurrencies used in DeFi transactions exempted from Capital Gains Tax (CGT) events, which typically occur when assets are disposed of. Instead, 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 aim of the consultation is 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.

The consultation is the second stage of a five-step process, which will be followed by drafting legislation, implementing and monitoring, and ultimately, reviewing and evaluating the change. The British government took the first step in the process in July 2022 by soliciting feedback on the taxation of crypto asset loans and staking within the context of DeFi. The main objective of the proposed changes is 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. The proposed changes, if implemented, could have a significant impact on the DeFi ecosystem in the UK and may pave the way for other countries to follow suit in establishing clearer tax guidelines for DeFi activities.

In conclusion, the proposed changes to the tax treatment of DeFi staking and lending activities in the UK represent an important 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.