UK Considers Taxation Revisions for DeFi Lending and Staking Activities – Here’s The Latest

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Asad Gilani

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Asad Gilani

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June 26, 2023 06:58 EDT

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According to a consultation document, the UK government is seeking views on tax modification for decentralized finance (DeFi) lending and staking. 

The government has initiated an open consultation to gather insights for drafting improved tax legislation on DeFi transactions.

The consultation aims to establish a framework that aligns taxation on crypto assets involved in DeFi transactions with their underlying economic substance.

The proposed reforms will reduce the administrative burden on consumers.

UK Treasury Seeks Public Opinion For DeFi Taxation Reforms

The UK government wants to revise the DeFi lending and borrowing tax treatment amid several calls for clear legislative pathways for crypto assets and products. 

As such, the HM Revenue and Customs (HMRC) seeks an open consultation to hear from DeFi investors, professionals, and firms.

Also, the agency wants insight from technology and financial services firms, trade associations, and representative bodies, including legal, accountancy, and tax advisory firms. 

Per the publication, the consultation will run for several weeks, from April 27 to June 22, 2023.

The UK government aims to create a safe and sustainable environment for rapid innovation in the crypto and blockchain industry. 

Doing so will place the United Kingdom at the forefront of innovation in the novel fintech industry.

The government, therefore, plans to achieve that by establishing comprehensive regulatory and tax treatment of cryptocurrencies. 

The open consultation is the sequel to a call for evidence on the taxation of DeFi lending and borrowing on July 5, 2022.

Last April, the UK Treasury sought measures to retain the country’s leadership position in Fintech. 

Among the measures announced was to explore and resolve issues on taxation of DeFi lending and staking.

Proposed Tax Revision In Detail

Open reformation, the proposed tax legislation will change the current Capital Gains Tax (CGT) rules on DeFi, which are inconsistent with its lending and staking activity.

Notably, the proposed tax changes would ensure that authorities would no longer treat crypto used in DeFi transactions as a disposal for tax purposes. 

Tax disposal would only arise when the crypto assets become economically disposed of in a non-DeFi Transaction.

Furthermore, the HMRC summarized the tax consequences on the most common DeFi scenarios while noting the criteria to define transactions as DeFi or non-DeFi. 

For a transaction to qualify as a DeFi transaction, it must involve a transfer of crypto assets from a lender to a borrower. 

Transactions conducted through a smart contract where the borrower must return the tokens also qualify as DeFi transactions.

Although the legislative change focuses on DeFi lending and staking, the proposed tax framework will apply to crypto lending and borrowing through intermediaries.