UK Crypto Tax Advisors Welcome Proposed Changes to DeFi Lending, Staking Treatment

Tax advisors in the U.K. have welcomed proposed rules for decentralized finance (DeFi) lending and staking activities, calling it a positive step that offers some “certainty” for the crypto industry.

On Thursday, the U.K. government's tax branch, His Majesty's Revenue and Customs (HMRC), announced it will be consulting crypto stakeholders for the next eight weeks on its plan.

The new framework proposes that capital gains tax charges for DeFi lending or staking be triggered only with some activities – and not for all transactions.

"This is a positive step for the crypto asset industry in the U.K. Whilst regulators may appear in the U.S. to be creating confusion, these moves aim to provide certainty for the U.K. industry,” Dion Seymour, crypto and digital asset technical director of U.K. tax service provider Andersen said in an emailed statement to CoinDesk.

“We applaud HMRC for being the first tax administration to provide specific rules for DeFi,” Seymour added.

David Lesperance, managing director and tax advisor at Lesperance Associates called the HMRC’s proposal an “excellent result,” in a statement. Meanwhile, lawmaker Lisa Cameron, chair of a cross party group for crypto in Parliament, said she was hopeful this would be the first step towards a comprehensive tax framework.

Simplifying crypto taxes

The government said in its consultation that it agreed with industry members who had previously called for specific rules for DeFi markets, similar to those for repo and stock lending.

Ian Taylor, board advisor at industry lobby group CryptoUK, told CoinDesk in an interview in July that the crypto industry and its advocates were calling for new crypto tax rules for DeFi lending as the old ones triggered too many taxable events and were “outdated” policies.

However, while Lesperance believes this will simplify things for the industry, Seymour does not.

“An opportunity to simplify the rules may have been lost," Seymour said.

He pointed to another – in his view simpler – option in the HMRC’s original call for evidence, which proposed treating the transfer of crypto for lending and staking as “no gain no loss” transactions, “deferring the tax liability until the assets are economically disposed of.”

By going with the authority’s proposed approach – that leans on repo and stock lending rules and would only remove some lending and staking activities from the scope of capital gains tax – complicates the tracking of taxable events, according to Seymour.

In its consultation, the HMRC said the “no gain, no loss” option would impose a larger administrative burden, while offering less flexibility to accommodate future legislative changes to match new developments in the DeFi world.

Seymour also noted the potential danger in people thinking there aren’t going to be any taxable events in DeFi.

“The general public who already have a very scant knowledge about how tax works and are even less inclined to actually read HMRC guidance, so the education side is still going to be quite critical,” he said.

Read more: UK Crypto Tax Guide 2022