The UK government has unveiled a proposed tax framework for decentralized finance (DeFi) users, aiming to simplify taxation for crypto lending and liquidity pool activity. The new approach, welcomed by the local crypto industry, would defer capital gains tax until tokens are sold, rather than taxing every protocol interaction.
Key Features of the Proposal
- No Gain, No Loss: Users would not pay capital gains tax when depositing tokens for lending, borrowing, or liquidity pool participation.
- Taxable Events Deferred: Gains or losses would only be calculated upon redemption of liquidity tokens, comparing the number of tokens received with the original contribution.
- Current Rule vs Proposal: Currently, any deposit into a protocol can trigger capital gains tax, which ranges from 18% to 32% in the UK depending on the situation.
Industry Response
- Sian Morton (Relay Protocol): Calls it a “meaningful step forward” for UK DeFi users, aligning tax treatment with the economic reality of DeFi interactions.
- Maria Riivari (Aave): Highlights that the change clarifies that DeFi transactions aren’t taxed until tokens are sold, bringing transparency for users.
- Stani Kulechov (Aave CEO): Labels it a major win for those borrowing stablecoins against crypto collateral.
The proposal has been praised as a positive signal for the UK’s evolving crypto regulatory stance, with other countries potentially observing its development.
Next Steps
- HM Revenue & Customs (HMRC) continues consultations with stakeholders to assess the framework’s viability and potential legislative changes.
- The agency is reviewing responses from exchanges, venture capital firms, tax professionals, and industry groups, including Binance, a16z Capital, and Crypto UK.
- No final decision has been made yet, but the proposal marks a significant step toward clearer, DeFi-friendly taxation in the UK.
This change, if enacted, would make DeFi borrowing, lending, and liquidity pool activity far more accessible to UK users while aligning tax obligations with actual economic outcomes.