The United Kingdom is gearing up for tax treatment of lending and borrowing on decentralized finance (DeFi) protocols. The country’s taxation division – HM Revenue and Customs – released a consultation document seeking views on modifying the tax treatment of DeFi lending and staking.
The final decision on whether to proceed with legislative changes will be made after the consultation. This is the second stage of a five-step process and will be followed by drafting legislation, implementing and monitoring, and ultimately, reviewing and evaluating the change.
Taxation for DeFi
The main aim of the consultation is to create a regime that aligns the taxation of crypto assets used in DeFi lending and staking transactions with the underlying economic substance while bringing down the administrative burden on users, the official press release stated.
The government aims to establish clear tax and regulatory treatment of the field to position the country “at the forefront of safe, sustainable, and rapid innovation in crypto assets and blockchain technologies.”
As such, the tax authority has called on investors, professionals, and firms engaged in DeFi activities, including technology and financial service firms; trade associations and representative bodies; academic institutions and think tanks; and legal, accountancy, and tax advisory firms to submit their views on the matter by 22 June 2023.
“The government is inviting answers to the questions below on a potential legislative solution which aims at better aligning the taxation of crypto assets used in DeFi transactions with the underlying economic substance. In addition to the specific questions posed, a more general comment on the issues discussed is welcome”
The proposed legislative modifications state that the crypto used in DeFi transactions would no longer be treated as a disposal for tax. Instead, Capital Gains Tax (CGT) would apply in addition to tax disposal when the crypto assets are economically disposed of in a non-DeFi transaction.
Crypto Regulation in the UK
Economic Secretary to the UK Treasury, Andrew Griffith, revealed last week that the authorities are planning to impose a regulatory framework on the crypto industry in the next 12 months.
The lawmaker asserted that the upcoming regulation will foster the development of the asset class and is aimed at turning the Kingdom into a global cryptocurrency hub.
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