The UK has launched a new tax framework to ease the burden on decentralized finance (DeFi) users, deferring capital gains tax for users of crypto loans and liquidity pools until the underlying tokens are sold, a move welcomed by the domestic industry.
HM Revenue and Customs (HMRC) on Wednesday proposed a “no gain, no loss” approach to DeFi. This includes lending tokens and receiving returns of the same type, borrowing arrangements, and moving tokens into liquidity pools.
According to the proposal, taxable gains and losses would be calculated based on the number of tokens returned when the liquidity tokens are redeemed compared to the number originally donated by the user.
Currently, when a user deposits funds into a protocol, regardless of the reason, the transfer may be subject to capital gains tax. In the UK, capital gains tax rates vary between 18% and 32% depending on the deed.
Tax framework is a ‘positive signal’ for UK crypto regulation
Sian Morton, head of marketing at cross-chain payment system Relay Protocol, said HMRC’s no-gain, no-loss approach is “a meaningful step forward for UK DeFi users who borrow stablecoins against cryptocurrencies, bringing their tax treatment closer to the actual economic realities of these interactions.”
“It’s a positive signal for the evolution of the UK’s attitude towards crypto regulation,” she added.
Maria Revali, a lawyer for DeFi platform Aave, said the change “makes clear that there are no taxes on DeFi transactions until you actually sell the tokens.”
“Other countries facing similar issues may also wish to take note of HMRC’s approach and the depth of research and consideration behind it,” she added.
Aave CEO Stani Krechov said the proposal is “a huge win for UK DeFi users who want to borrow stablecoins against cryptocurrencies.”
Related: Switzerland postpones sharing of virtual currency tax information until 2027
DeFi tax review has not been finalized yet
However, this proposal has not yet been agreed upon. HMRC said it was continuing to engage with stakeholders “to assess the merits of this potential approach and the need to make legislative changes to the rules governing the taxation of cryptoassets loans and liquidity pools”.
“In particular, this is to ensure that the scope of transactions that may take place under these arrangements is covered and that individuals are able to comply,” the agency added.
The initial consultation saw 32 formal written responses submitted by individuals, businesses, tax professionals and representative bodies including cryptocurrency exchange Binance, venture capital firm A16Z Capital Management and self-regulatory industry body Crypto UK.
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