UK Treasury To Seek Input on Taxing DeFi

The HM Revenue and Customs, the taxation division of the United Kingdom, has released a consultation document seeking views on the taxation of lending and borrowing on decentralized finance (DeFi) protocols.

The consultation aims to create a tax regime that aligns the taxation of crypto assets used in DeFi lending and staking with the underlying economic substance while reducing the administrative burden on users.

The UK government aims to establish a clear tax and regulatory treatment of the DeFi field to position the country as a leader in safe, sustainable, and rapid innovation in crypto assets and blockchain technologies.

The proposed legislative modifications suggest 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.

This consultation marks the second stage of a five-step process, and the final decision on whether to proceed with legislative changes will be made after the consultation. The other steps include drafting legislation, implementing and monitoring, and reviewing and evaluating the change.

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 are invited to submit their views on the matter by 22 June 2023.

The Economic Secretary to the UK Treasury, Andrew Griffith, revealed that the authorities are planning to impose a regulatory framework on the crypto industry in the next 12 months. The lawmaker believes that the upcoming regulation will foster the development of the asset class and turn the UK into a global cryptocurrency hub.

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