The United Kingdom is poised to tackle the tax treatment of decentralized finance (DeFi) lending and borrowing protocols, as its taxation authority, HM Revenue and Customs, seeks public opinion on the matter. A consultation document has been released to gather views on potential adjustments to the tax treatment of DeFi lending and staking activities. This marks the second stage of a five-step process that will culminate in a decision to either proceed with or abandon legislative changes.
The consultation aims to establish a tax regime that meshes with the economic substance of crypto assets used in DeFi lending and staking, while reducing the administrative burden on users. The government aspires to create clear tax and regulatory treatment for the sector, positioning the UK “at the forefront of safe, sustainable, and rapid innovation in crypto assets and blockchain technologies.” To this end, stakeholders such as investors, professionals, firms engaged in DeFi activities, academic institutions, and legal, accountancy, and tax advisory firms have been invited to participate in the consultation, which runs until 22 June 2023.
The proposed amendments would alter the treatment of crypto assets used in DeFi transactions, moving away from being classified as “disposals” for tax purposes. Instead, Capital Gains Tax (CGT) would apply in addition to tax disposal when these assets are utilized in non-DeFi transactions. This legislative modification seeks to better align taxation with the economic substance of the transactions.
The push for regulatory clarity coincides with the announcement by Economic Secretary to the UK Treasury, Andrew Griffith, that the government plans to implement a regulatory framework for the crypto industry within the next 12 months. This framework aims to foster the development of the asset class and transform the UK into a global hub for cryptocurrency.
In conclusion, the UK government’s attempt to address the DeFi tax dilemma is a complex yet necessary tussle between innovation and taxation. While it is crucial to maintain a balanced approach to safeguard the interests of investors and other stakeholders, regulators must also consider the wider implications of stifling the growth of a rapidly-evolving and innovative sector. The outcome of this consultation will be crucial in determining the UK’s position as a hub for crypto assets and blockchain technologies, and may set a precedent for other countries grappling with the same issues.