UK opens consultation on taxation of DeFi transactions

• UK’s HM Treasury has outlined tax policy changes targeted at DeFi lending and staking.
• The proposals are part of a consultation on taxation of activities conducted using crypto assets in DeFi.
• The new changes are also looking to apply to crypto lending and staking transactions on centralised finance (CeFi) platforms.

HM Treasury, the UK’s economic and finance ministry, has announced an open consultation regarding the taxation of decentralised finance (DeFi) activities.

Per a publication the government released on Thursday, 27 April 2023, the consultation seeks to have public views on the modification of tax policies to cater to crypto asset related lending and staking – two key activities in the DeFi industry.

The objective of the consultation is to help formulate a crypto tax regime for the UK, where taxation DeFi lending and staking “better aligns with the underlying economic substance, whilst reducing the administrative burden on users,” the HM Treasury wrote.

HMRC is therefore looking to get feedback from key stakeholders within the DeFi space, including tech and financial firms involved in DeFi, investors, and professionals. Also invited to participate are trade associations, academic institutions, legal firms, and tax advisory firms among others.

Crypto tax framework also targets CeFi

The government also says that the consultation seeks to explore legislative changes to overall tax treatment of lending and staking in the industry. The changes, the HM Treasury noted, involve proposals that using cryptocurrencies in DeFi transactions “would no longer be treated as giving rise to a disposal for tax purposes.”

Rather, tax disposals will only arise where taxpayers economically dispose of their crypto assets via non-DeFi transactions. The finance ministry added in the announcement:

“Although the focus of this document is on DeFi lending and staking, the proposed tax framework outlined below is also intended to apply to the lending and staking of crypto assets which is done through an intermediary. Some industry participants refer to these arrangements as Centralised Finance (CeFi).”

HM Treasury’s consultation paper comes amid increased recognition within the government agencies that proper and clear regulatory approach to crypto is needed as the industry grows rapidly. 

The proposals are likely to form a major part of the UK’s crypto tax guidelines in 2024, the same year the EU’s crypto law MiCA is expected to come into effect.