HMRC Requests Input on DeFi Taxes

The government of the United Kingdom is requesting input on DeFi taxes to position itself as a hub for crypto innovation and investment. To accomplish this they have introduced a package that includes various policies such as the regulation and normalizing stablecoins as a form of payment, establishing a Cryptoasset Engagement Group to work more closely with the industry and extending the scope of the Invesment Manager Exemption to include cryptocurrencies and NFTs.

Another measure includes enhancing the competitiveness of the UK tax system to encourage further development of the crypto market.  One major policy under review is the tax treatment of DeFi (Decentralized Finance) loans – where holders of crypto assets lend tokens out for return. This area has many unanswered questions regarding tax treatment, and HMRC (HM Revenue and Customs) is looking at 3 different policy options:

• Option 1 - Legislate to bring DeFi lending and staking within the Repo and Stock Lending rules by defining crypto assets as ‘securities’.
• Option 2 - Legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending.
• Option 3 - Apply a ‘no loss no gain’ treatment to DeFi loans and staking, deferring the tax liability until the assets are economically disposed of.

The UK government is giving the crypto community an opportunity to share their opinion regarding the DeFi tax structure and to develop the ideal tax framework for DeFi taxation.  HMRC has requested input through a call for evidence on crypto asset loans and staking in the context of DeFi from investors, professionals, and firms engaged in DeFi activities. The request includes 11 questions:

1. HMRC would like more information about the UK DeFi lending and staking sector. Please provide any information you hold that is relevant to the following questions. Where appropriate, please summarise data using appropriate ranges or categories, rather than providing only totals or minima and maxima.
   • How many DeFi lending and staking platforms are you aware of that are based in the UK? What is the approximate value of their assets?
   • Approximately how many UK-based individuals engage in DeFi lending and staking, and how much do they lend/stake?
   • How many non-UK-based individuals are served by UK platforms and what amounts do they invest?
   • How frequently do individuals transact, and what is the duration of each lending or staking transaction?
   • Approximately what percentage of UK-based individuals engaging in DeFi are serviced wholly or mainly by UK platforms? Where else are the platforms UK individuals use commonly based?
2. Bearing in mind that UK individuals are subject to the same tax treatment for DeFi lending and staking wherever the platforms they use are located, does the current tax treatment make the UK less attractive to platforms as a place to do business? If so, which jurisdictions are favoured and why?
3. Approximately what proportion of DeFi lending and staking transactions give rise to disposals for tax purposes under current rules?
4. Of the transactions giving rise to the disposals, what proportion would fall within the (i) Repo rules and (ii) Stock Lending rules, if crypto assets were treated as securities?
5. Do you favour changes to the current rules?
6. Do you consider Option 1 to be a suitable model for DeFi lending and staking transactions? What are the pros and cons?
   • If appropriate, should the Repo, the Stock Lending or both regimes be expanded to apply to DeFi transactions?
7. Do you consider Option 2 to be a suitable option? What are its pros and cons?
   • Should the new rules be modelled on the Repo rules or the Stock Lending rules, or would both sets of rules be needed to cater for different contractual arrangements?
8. Do you consider Option 3 to be a suitable option? What are its pros and cons?
9. Are there alternative approaches to the taxation of DeFi lending and staking that have been adopted by other jurisdictions that the government could consider? If so, please provide more details and reasons.
10. Besides the options outlined above are there any further options for change that the government could consider?
11. How could the government be confident that any proposed rules would not discriminate in favour of users of DeFi services?

They will be accepting comments via email until August 31, 2022.

Previous research has found that just 58 per cent of UK crypto investors do not know the tax implications of trading crypto, a major catalyst for this initiative by HMRC.  For information on how HMRC currently classifies decentralized finance and its taxation, see our UK DeFi Tax Guide, along with our other UK crypto tax resources.

If you have any questions or comments about crypto taxes, let us know on Twitter @CoinTracker.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.