February 3, 2022

The UK has updated the tax rules for steaking and DeFi-lending

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The UK has updated the tax rules for steaking and DeFi-lending

The UK HM Revenue & Customs (HMRC) has updated guidance on the taxation of income from staking and lending through DeFi services.

Under the rules, tax on the income from these transactions depends on whether it is treated as capital gains or income. The authority admitted that classification is a challenge.

Lending/staking tokens through decentralized finance is a constantly evolving field. It is therefore not possible to define all the circumstances in which a lender/liquidity provider generates profits from its activities and the nature of those profits. Instead, some guidelines are set out, says the document.

HMRC first published guidance for taxation of steaming in March 2021. At the time, the authority said the tax depended on there being a “taxable trade” in the activity.

CryptoUK, the digital asset trading association, said the new rules make significant changes to the classification and tax treatment of DeFi.

Under the updated guidance, proceeds can be treated as capital gains or income based on many factors, including:

Whether the number of proceeds was known at the time of entering into the agreement;
whether the proceeds are paid periodically or upon repayment of principal
whether the loan period is short-term or long-term.
HMRC also noted the process of realizing the yield—if it is through the liquidation of the underlying assets, it indicates capital receipts.

On this basis, CryptoUK suggested that HMRC could classify as a taxable disposal transaction a transaction where the token leaves the user's wallet for lending or staking on the DeFi-platform. At that point, it will be subject to capital gains tax reporting, even though the user still owns the asset and expects to return it in the future, the association said.

HMRC guidance also says there may be additional factors that determine the nature of the receipts, and all the facts of the transaction need to be considered.

CryptoUK CEO Ian Taylor said the new rules “add unnecessary reporting requirements and create confusion about tax compliance”.

Jack Evans

About the author

I became a crypto asset owner in 2014, when the industry was in its infancy. Before that, I was working in the classic US and European stock markets. Since then, I have gained extensive experience in both cryptocurrency investing and day trading. I am happy to share with readers my experience with crypto exchanges, DeFi and NFT instruments. 

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