UK DeFi Users Could Stop Paying Tax on Crypto Deposits Under New Proposal

TLDR

• UK’s HMRC proposes “no gain, no loss” tax framework for DeFi transactions including crypto lending and liquidity pools
• Capital gains tax would be deferred until tokens are actually sold or redeemed, not when deposited into protocols
• Current UK rules can trigger capital gains tax of 18-32% on deposits regardless of whether users make actual gains
• Major industry players including Aave, Binance, and a16z submitted feedback supporting the proposal
• The proposal is not final yet and HMRC continues consulting with stakeholders before potential legislation

The UK government has proposed changes to how decentralized finance transactions are taxed. The new framework could eliminate immediate tax burdens on DeFi users.

HM Revenue and Customs released a proposal on Wednesday for a “no gain, no loss” approach to DeFi activities. This would apply to crypto lending, borrowing arrangements, and liquidity pool deposits.

Under current UK tax rules, depositing cryptocurrency into a DeFi protocol can trigger capital gains tax. This happens even if the user hasn’t actually sold their assets or made any profit. Capital gains tax rates in the UK range from 18% to 32% depending on the specific transaction.

The new proposal would defer these taxes until a user actually redeems their tokens. At that point, gains or losses would be calculated based on how many tokens they receive back compared to what they originally put in.

The change addresses a major pain point for DeFi users. Many find the current system creates tax obligations that don’t match their actual financial activity.

Sian Morton from Relay protocol said the proposal moves tax treatment “closer to the actual economic reality” of DeFi interactions. She described it as a positive signal for UK crypto regulation.

The proposal handles complex multi-token arrangements common in DeFi protocols. If users receive more tokens back than they deposited, the gain would be taxed. If they receive fewer tokens, it would count as a loss.

However, some crypto activities would still trigger taxes under the new rules. Purchasing ether, converting it to wrapped ether, and liquidating DeFi gains would remain taxable events.

The proposed definition would exclude tokenized real-world assets and traditional securities. This keeps the focus on typical DeFi tokens rather than regulated financial instruments.

HMRC received 32 formal written responses during its initial consultation period. Respondents included Binance, venture capital firm a16z Capital Management, and trade association Crypto UK. Most supported the shift to “no gain, no loss” treatment.

Some respondents raised concerns about transaction reporting requirements. Even under the new system, users might need to report high volumes of transactions. HMRC said it is working with software providers to assess this burden.

The proposal is not final legislation yet. HMRC stated it will continue engaging with stakeholders to assess the merits of the approach. The agency wants to ensure the rules cover the full range of DeFi transactions and remain practical for individuals to follow.

HMRC has not announced a timeline for when the changes might become law. The agency said it will keep consulting with the crypto sector as it evaluates whether to move forward with legislative changes.

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