UK Treasury Discusses Taxing the DeFi Industry on Staking and Lending 

The Uk’s proposed regulatory reforms will seek to simplify how returns from DeFi are taxed to reduce the administrative burden on taxpayers.

Reports are saying there could be a change in how lending and borrowing on DeFi protocols are treated tax-wise as the taxation arm of the UK treasury is seeking input on the possibility of a new regime.

A consultation on April 27 by HM Revenue and Customs remains ongoing till June 22. It requests investors, professionals, and firms engaged in DeFi activities, alongside their representative bodies and thinks tanks, to submit their respective views on the government’s proposal on DeFi tax treatment.

Under the proposed legislative changes, the government will not count crypto used in DeFi transactions as disposal for tax, which usually triggers a Capital Gains Tax (CGT) event.

It would instead make a Capital Gains Tax apply, and a tax event would occur when cryptocurrencies become disposed of in a non-DeFi transaction.

According to info from the consultation, a transfer needs to meet specific criteria to be considered a DeFi transaction, and it needs to specifically involve the transfer of crypto assets from a lender to a borrower or through the use of a smart contract, with the one doing the borrowing, required to return the tokens.

In addition, the lender must have the capacity to retrieve the same quantity of tokens that they initially loaned to another party or staked on their behalf.

The consultation aims to develop a framework that, in addition to providing more consistent taxation of crypto assets used in DeFi lending and transactions, will simplify user compliance with the existing legislation.

The proposed tax structure would categorize all DeFi returns as revenue and assign them to a new miscellaneous income charge specific to crypto asset transactions. This would reduce the administrative burden placed on participants.

The consultation is just the second step in a five-step process. It will be followed by drafting legislation, monitoring and implementing, and eventually reviewing and evaluating the change.

The British government started this new taxation process in July 2022 by soliciting feedback on the taxation of crypto asset loans and staking within the context of DeFi.

Conclusion

The objective of simplifying the administrative process was noted as the primary objective to reduce cost loads on taxpayers who participate in DeFi. At the same time, they also explored how the tax system could better reflect the economic substance of the DeFi transactions.

The consultation on this tax regulation reform will close in the next two months.