UK tax agency cracks down on rules around DeFi lending and staking

“HMRC treats crypto assets as property for tax purposes. However, this is inconsistent with the approach currently being adopted by Government and other regulatory bodies in the UK," said the executive director of CryptoUK Ian Taylor

Her Majesty’s Revenue and Customs (HMRC), the U.K.’s tax agency, on Wednesday, has released a controversial set of guidance that could affect innovation in Decentralized Finance (DeFi).

The updated regulation focuses on the treatment of digital assets specifically for DeFi lending and staking in the UK, and whether returns or rewards from these services are deemed as capital or revenue for taxation purposes. Owing to the cutting edge nature of DeFi these services had fallen into a grey area with tax professionals unsure of how the existing rules apply.

“The lending/staking of tokens through decentralized finance (DeFi) is a constantly evolving area, so it is not possible to set out all the circumstances in which a lender/liquidity provider earns a return from their activities and the nature of that return. Instead, some guiding principles are set out,” the HMRC update stated.

HMRC has updated its guidance on the treatment of crypto and digital assets, specifically for decentralised finance (DeFi) lending and staking in the UK, significantly altering their classification and treatment. Full report and our response here - https://t.co/8XXD0bm34O pic.twitter.com/Q3N7La5FVX

— CryptoUK (@CryptoUKAssoc) February 2, 2022

The guidance outlined that returns via staking and lending of DeFi assets will not be treated as "interest" as digital assets in the UK aren’t considered currencies, but rather property for tax purposes.

However, this approach could create tax problems for stakers with the guidance suggesting that in many cases it would indicate that “beneficial ownership of those tokens” had been passed to the platform. This would mean they were disposed of for tax purposes and incur Capital Gains Tax.

Ian Taylor, executive director of CryptoUK asserted the new regulations would create an "unnecessary burden" for crypto investors that stock market investors do not face when lending shares:

“HMRC treats crypto assets as property for tax purposes. However, this is inconsistent with the approach currently being adopted by Government and other regulatory bodies in the UK, including the Treasury and the FCA”

Right,so if i have to pay taxes on staking, isn't that double taxing....Let's say i stake 200 000 pounds worth of crypto on 10% APY, that will be worth 20 000,so i will have to tax as i earn it and after that tax it again once i exchange it for fiat/different asset?

— Dalek Alpha (@vlad_ned) February 2, 2022

Taylor added that the new rules add “undue reporting requirements for the consumer, and create tax compliance confusion” as investors will have to report on hundreds or even thousands of transactions.

“This is out of step with the Government’s stated aim for the UK to be open and attractive as a destination for investment and innovation post Brexit,” he said.

Related: SEC's proposed rule on exchanges could threaten DeFi, says Crypto Mom

Last week, former Secretary of State for Health and Social Care current U.K. Member of Parliament (MP) Matt Hancock urged the House of Commons to introduce progressive crypto policy to make England the “home” of crypto.

In November last year HMRC laid out regulations concerning the introduction of digital services tax levied on crypto exchanges operating in the UK