UK Treasury is expecting feedback on taxing DeFi staking and lending

As the taxation division of the Treasury solicits feedback on a potential new regime, the taxation of lending and staking on decentralized finance (DeFi) protocols may soon change in the United Kingdom.

HM Revenue and Customs launched a consultation on April 27 that will last until June 22 and requests input on the government's proposed DeFi tax treatment from "investors, professionals, and firms engaged in DeFi activities," as well as from representing organizations and think tanks.

UK Treasury seeks input on taxing DeFi staking and lending

The taxation of lending and staking on decentralised finance (DeFi) protocols may soon alter in the UK as the taxes division of the Treasury seeks input on a potential new system.

The government is seeking feedback on the proposed DeFi tax treatment from "investors, professionals, and firms engaged in DeFi activities," as well as from representative organisations and think tanks, in a consultation that HM Revenue and Customs opened on April 27 and will remain through June 22.

The proposed legislative amendments would exclude cryptocurrency used in DeFi transactions from tax treatment as a disposal, which typically results in a Capital Gains Tax (CGT) event. When cryptocurrencies are disposed of in a non-DeFi transaction, CGT would instead be applicable and a taxable event would take place.

A transaction must fulfil specific requirements in order to be classified as a DeFi transaction, according the consultation.

It should specifically entail the initial transfer of cryptocurrency assets from a lender to a borrower, or through a smart contract, with the borrower being required to return the tokens. The lender should also be permitted to withdraw the exact same number of tokens that they first staked or lent.

The consultation's objective is to create a framework that "better aligns" the taxation of bitcoin assets used in DeFi loan and staking transactions while facilitating user compliance with the rules. It said:

"The new tax framework could treat all DeFi returns as being revenue in nature and charged to a new miscellaneous income charge specific to cryptoasset transactions in order to reduce the administrative burden for participants."

The consultation is the second phase of a five-part process that also includes writing legislation, putting the change into effect and monitoring it, and finally assessing and evaluating it.

By asking for input on the taxation of crypto asset loans and staking within the context of DeFi, the British government took the first step in the process in July.

The major goal, as previously stated, was to streamline the administrative procedure, lower expenses for taxpayers taking part in DeFi, and investigate how the tax treatment may better reflect the economic significance of these transactions.