UK Treasury seeks input on taxing DeFi staking and lending

April 27. 2023

By Ciaran Lyons

The proposed regulatory changes seek to simplify how DeFi returns are taxed and reduce the “administrative burden” for taxpayers.

The tax treatment of lending and borrowing on decentralized finance (DeFi) protocols could soon be changed in the United Kingdom, as the taxation arm of the Treasury is seeking input on a possible new regime.

An April 27 consultation by HM Revenue and Customs will run until June 22 and asks for “investors, professionals and firms engaged in DeFi activities” along with representative bodies and think tanks to submit their views on the government's proposed DeFi tax treatment.

Under the proposed legislative changes, crypto used in DeFi transactions wouldn’t be treated as a disposal for the purposes of tax, which usually trigger a Capital Gains Tax (CGT) event.

Instead, CGT would apply — and a taxable event would occur — when cryptocurrencies are disposed of in a non-DeFi transaction.

A summary of scenarios and their proposed tax implications. Source: gov.uk

According to the consultation, a transaction must meet certain criteria to be considered a DeFi transaction.

Specifically, it should 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.

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