His Majesty’s Revenue and Customs is consulting with users and providers of lending and staking services to make legislative changes to the DeFi sector tax regime.
The U.K. government is holding a public consultation aimed at creating a new tax regime for crypto-assets used in DeFi lending and staking activities.
The new rules are expected to address key economic aspects while reducing the administrative burden on users. For example, under the proposed legislative changes, when cryptocurrency is used in DeFi protocols, its sale won’t be considered a taxable event, which usually involves paying Capital Gains Tax (CGT).
Transactions must meet certain criteria in order to be considered DeFi-related:
- the transaction must involve an initial transfer of crypto-assets from the lender to the borrower or through a smart contract;
- the borrower must return the tokens;
- the lender must have the right to withdraw the same amount of tokens they lent or deposited.
In this case, making a profit wouldn’t be considered a taxable event. The government would only impose CGT tax when the cryptocurrency is involved in a transaction not related to DeFi. For instance, in exchange for fiat.
There may be a new tax system to reduce the administrative burden on participants. It would treat all DeFi-related returns as income in nature and impose a new income tax that would be specific to this type of crypto transaction.
The consultation will be conducted by the U.K. HM Revenue and Customs for eight weeks beginning April 27, 2023 and ending June 22, 2023. During this time, “investors, professionals, and firms engaged in DeFi activities,” along with representative bodies and think tanks, will be free to express their views and offer ideas as part of introducing a new tax regime for the DeFi sector.
The U.K. government increased control over the crypto market as part of measures to combat economic crime. According to the plans of the local lawmakers, this approach will force criminals, whose number is actively growing in the country, to move to less regulated jurisdictions.
