UK Floats DeFi Tax Relief: A 'No Gain, No Loss' Approach

UK Floats DeFi Tax Relief: A 'No Gain, No Loss' Approach

The United Kingdom has unveiled a proposed tax framework designed to alleviate the tax burden on users of Decentralized Finance (DeFi). The framework proposes deferring capital gains taxes on crypto lending and liquidity pool participants until the underlying digital asset is ultimately sold. This initiative has been met with considerable approval from the sector.

Her Majesty's Revenue and Customs (HMRC), the UK's tax authority, outlined a 'no gain, no loss' approach concerning DeFi transactions. This approach encompasses lending out digital tokens and receiving the same type of token in return, borrowing arrangements, and the movement of tokens into liquidity pools.

Under the proposed framework, taxable gains or losses would be calculated when liquidity tokens are redeemed. This calculation would be based on the quantity of tokens a user receives back compared to the quantity they initially contributed. Currently, depositing funds into a protocol, regardless of the reason, may trigger capital gains tax liabilities, ranging from 18% to 32%, depending on the specific transaction.

Tax Framework a 'Positive Signal' for UK Crypto Regulation

Sian Morton, Marketing Lead at crosschain payments system Relay Protocol, commented that HMRC’s 'no gain, no loss' approach represents 'a meaningful step forward for UK DeFi users who borrow stablecoins against their crypto collateral, and moves tax treatment closer to the actual economic reality of these interactions.'

She added, 'A positive signal for the UK’s evolving stance on crypto regulation.'

Maria Riivari, a lawyer at the DeFi platform Aave, stated that the proposed change 'would bring clarity that DeFi transactions do not trigger tax until you truly sell your tokens.'

She further noted, 'Other countries facing similar questions may want to take note of HMRC’s approach and the depth of research and consideration behind it.'

Aave CEO Stani Kulechov described the proposal as 'a major win for UK DeFi users who want to borrow stablecoins against their crypto collateral.'

DeFi Tax Overhaul Not Yet Finalized

It is important to note that the proposal is not yet a certainty. HMRC has stated that it remains engaged with relevant stakeholders 'to assess the merits of this potential approach, and the case for making legislative change to the rules governing the taxation of crypto asset loans and liquidity pools.'

The agency further clarified its intention to ensure that the framework 'would cover the range of transactions that can take place under these arrangements and would be viable for individuals to comply with.'

During the initial consultation phase, HMRC received 32 formal written responses from individuals, businesses, tax professionals, and representative bodies. These responses included submissions from crypto exchange Binance, venture capital firm a16z Capital Management, and the self-regulatory trade association Crypto UK.