The United Kingdom has introduced a new tax framework designed to alleviate the financial pressure on decentralized finance (DeFi) users. This proposed framework includes provisions for deferred capital gains taxes on crypto lending and liquidity pool participation, with taxes only becoming applicable when the underlying token is eventually sold. The local cryptocurrency industry has responded positively to this development.
Her Majesty's Revenue and Customs (HMRC) put forward a "no gain, no loss" approach on Wednesday. This proposal is intended to cover scenarios such as lending out a token and receiving the identical token back, participating in borrowing arrangements, and moving tokens into liquidity pools.
According to the proposal, taxable gains or losses will be calculated at the point when liquidity tokens are redeemed. This calculation will be based on the comparison between the number of tokens a user receives back and the number they initially contributed.
Under the current tax regulations, depositing funds into a DeFi protocol, irrespective of the specific purpose, can potentially trigger capital gains tax. This tax rate can range from 18% to 32%, depending on the nature of the transaction.
Tax Framework Hailed as Positive Signal for UK Crypto Regulation
Sian Morton, marketing lead at the cross-chain payments system Relay protocol, commented that HMRC's proposed "no gain, no loss" approach represents a "meaningful step forward for UK DeFi users who borrow stablecoins against their crypto collateral." She further stated that this move aligns the tax treatment more closely with the actual economic realities of these financial interactions.
"This is a positive signal for the UK's evolving stance on crypto regulation," Morton added.
Maria Riivari, a lawyer at the DeFi platform Aave, noted that the proposed change "would bring clarity that DeFi transactions do not trigger tax until you truly sell your tokens."
"Other countries facing similar questions may want to take note of HMRC’s approach and the depth of research and consideration behind it," she suggested.
Stani Kulechov, CEO of Aave, described the proposal as "a major win for UK DeFi users who want to borrow stablecoins against their crypto collateral."
DeFi Tax Overhaul Not Yet Finalized
Despite the positive reception, the proposed tax framework is not yet set in stone. HMRC has indicated that it will continue to engage with relevant stakeholders to evaluate the merits of this potential approach. The agency is also assessing the case for implementing legislative changes to the existing rules governing the taxation of crypto asset loans and liquidity pools.
HMRC emphasized its commitment to ensuring that the framework would adequately cover the diverse range of transactions possible within these arrangements and would be practically compliant for individuals.
During the initial consultation phase, 32 formal written responses were received. These submissions came from individuals, businesses, tax professionals, and representative bodies, including notable entities such as crypto exchange Binance, venture capital firm a16z Capital Management, and the self-regulatory trade association Crypto UK.