The UK has launched a new tax framework that alleviates the burden on decentralized finance (DeFi) users by deferring capital gains tax for cryptocurrency lending and liquidity pool users until the underlying tokens are sold, which has been welcomed by the local industry.
The UK’s HM Revenue and Customs (HMRC) proposed on Wednesday a "no gain, no loss" approach to DeFi, covering the lending of tokens and the recovery of the same type of tokens, lending arrangements, and the transfer of tokens into liquidity pools.
According to the proposal, when liquidity tokens are redeemed, taxable gains or losses will be calculated based on the number of tokens the user recovers compared to the initial contribution.
Currently, when users deposit funds into a protocol, regardless of the reason, the operation may be subject to capital gains tax, with rates ranging from 18% to 32%, depending on the operation.
Sian Morton, market lead for the cross-chain payment system Relay Protocol, stated that HMRC's no gain, no loss approach is "a meaningful advancement for UK DeFi users who borrow stablecoins using crypto collateral, bringing tax treatment closer to the actual economic reality of these interactions."
"This is a positive signal regarding the evolution of the UK's crypto regulatory stance," she added.
Maria Riivari, a lawyer for the DeFi platform Aave, noted that this change "will bring clarity that DeFi transactions will not trigger taxes until you actually sell your tokens."
"Other countries facing similar issues may want to take note of HMRC's approach and the in-depth research and consideration behind it," she added.
Aave CEO Stani Kulechov stated that the proposal is "a significant victory for UK DeFi users looking to borrow stablecoins using crypto collateral."
However, the proposal has not yet been finalized. HMRC stated that it is continuing to engage with relevant stakeholders "to assess the merits of this potential approach and the rationale for legislative changes to manage tax rules for crypto asset lending and liquidity pools."
"In particular, ensuring that it can cover the range of transactions that may occur under these arrangements and that individuals can comply," the agency added.
In the initial consultation, individuals, businesses, tax professionals, and representative organizations submitted 32 formal written responses, including from cryptocurrency exchange Binance, venture capital firm a16z, and the self-regulatory trade association Crypto UK.
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Original: “UK Proposes Decentralized Finance (DeFi) Tax Reform, Taking a ‘Meaningful Step’”
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