The UK’s finance ministry, HM Treasury, has opened a consultation on potential tax regulations for decentralised finance (DeFi) activities, with a particular focus on lending and staking. The goal of the consultation is to align the tax regime more closely with the economic substance of DeFi activities while reducing the administrative burden on users.
Proposed Changes to DeFi Tax Regulations
As we reported on Zatrun.com, the proposed changes would mean that the use of crypto assets in DeFi transactions would no longer be treated as giving rise to a disposal for tax purposes. Instead, a tax disposal would arise only when the crypto assets are economically disposed of in a non-DeFi transaction. The consultation is also intended to apply to the lending and staking of crypto assets done through an intermediary.
The proposed tax regulations could have significant impacts on the DeFi market. Currently, its users often receive incentives such as tokens or interest for lending or staking their crypto assets on decentralised platforms. Under the current tax regulations, these incentives are often treated as income and subject to income tax. However, the proposed changes would likely mean that these incentives would no longer be taxed until the underlying crypto assets are sold, rather than when they are earned on the DeFi platform.
The consultation will have implications for users of third-party platforms, as well as for crypto investors. The proposed tax framework outlined by the Treasury is intended to apply to the lending and staking of crypto assets done through an intermediary, as well as to those conducted directly on the platforms. As a result, the proposed tax regulations would affect not only those platform users, but also those who use centralised platforms for their activities.
UK Government’s Efforts on Crypto-Specific Tax Policies
The UK government has been developing crypto-specific tax guidance and policies for the past two years. Starting in the 2024-2025 tax year, taxpayers in the country will be required to separate out crypto-derived profits on their tax returns. This consultation on DeFi tax regulations is part of a broader effort by the government to ensure that the UK’s tax policy keeps pace with the evolving nature of the crypto industry.
In summary, HM Treasury’s consultation on tax regulations for decentralised finance lending and staking is part of the UK government’s ongoing efforts to develop crypto-specific tax guidance and policies. The proposed changes would mean that the use of crypto assets in DeFi transactions would no longer be treated as giving rise to a disposal for tax purposes, and the proposed tax framework would apply to both decentralised and centralised platforms. The consultation is aimed at aligning the tax regime with the economic substance of decentralised activities while reducing the administrative burden on users.