UK Government Wants to Change Tax Laws to Better Suit DeFi

Participants would only need to pay for capital gains or income tax when digital assets are sold or exchanged for other crypto or for fiat currency

article-image

Ascannio/Shutterstock modified by Blockworks

share

The UK government has launched a consultation period seeking views on modifying the tax treatment of decentralized finance (DeFi) activity — particularly lending and staking. 

In the UK, earnings from DeFi activities such as borrowing and lending are currently considered “miscellaneous income,” subject to income tax. Capital gains tax is also levied when crypto tied to that activity is later sold.

But the government has learned that current tax rules can lead to transactions involved in standard DeFi activity being treated the same as asset sales “in some situations even though the effective economic ownership of the cryptoassets is retained.”

“The need to determine and record the market value of assets at each step in the transaction may also give rise to a disproportionate administrative burden,” HM Revenue & Customs said in its consultation documents.

Under the proposed legislative changes, standard DeFi transactions related to staking, borrowing, lending and liquidity provision would no longer be classified as disposals for tax purposes.

Tax disposal would instead trigger when digital assets are “economically disposed of” in a non-DeFi transaction, as in, when they’re sold on a crypto exchange.

This means participants would only need to pay for capital gains or income tax when digital assets are sold or exchanged for other crypto and/or for fiat currency — never during the staking or lending process.

Terms of the deal

Staking and lending transactions will need to include certain elements to qualify.

A borrower must also have an obligation to return the borrowed tokens, or a lender must have the ability to withdraw the tokens using a smart contract, per the proposed changes.

Any financial return earned by the lender prior to the sale or disposal of those tokens would still be subject to taxation.

The move is part of the UK’s broader push to retain what the government is calling a dominant position in fintech following expectations laid out in a speech by the country’s Economic Secretary to the Treasury last year.

It also follows the government’s prior consultations with various stakeholders in a bid to identify concerns and opportunities for changes. In July of last year, a “Call for Evidence” on the nature of DeFi taxation relating to staking and lending sought to outline key issues participants faced.

Those included confusing and outdated rules that were inconsistent with technological developments in the digital asset economy.

The DeFi consultation runs for eight weeks through to June 22.


Get the day’s top crypto news and insights delivered to your email every evening. Subscribe to Blockworks’ free newsletter now.


Want alpha sent directly to your inbox? Get degen trade ideas, governance updates, token performance, can’t-miss tweets and more from Blockworks Research’s Daily Debrief.


Can’t wait? Get our news the fastest way possible. Join us on Telegram and follow us on Google News.


Tags

upcoming event

MON - WED, MARCH 18 - 20, 2024

Digital Asset Summit (DAS) is returning March 2024. This year’s event will be held in our nation’s capital, where industry leaders, policymakers, and institutional experts will come together to discuss the latest developments and challenges in the ever-evolving world of cryptocurrency. […]

upcoming event

MON - WED, SEPT. 11 - 13, 2023

2022 was a meme.Skeptics danced, believers believed.Eventually, newcomers turned away, drained of liquidity and hope.Now, the tide is shifting and it’s time to rebuild. Permissionless II is the brainchild of Blockworks and Bankless. It’s not just a conference, but a call […]

recent research

Cosmos Hub: ATOM Economic Zone

Research

Replicated Security, the Hub’s Validation-as-a-Service offering that went live in March, is the first step in bringing value accrual to ATOM stakers.

/

article-image

OP holders might not be feeling very optimistic with the rollup’s token unlock schedule now in effect

article-image

Two lords are pushing for the government to ensure that the Bank of England could not implement “Britcoin” without legislative backing

article-image

This is the second fee switch proposal that failed to pass a community vote

article-image

This partnership comes as Nike released its first NFT collection, Our Force 1, this month

article-image

The weaknesses of large language models like ChatGPT are “too great to use reliably for security,” OpenZeppelin’s machine learning lead says

article-image

Giddy will now enable users to spend their yield on real-world goods and services