/ Crypto / Cryptoasset regulation – next stage of plans revealed

Cryptoasset regulation – next stage of plans revealed

May, 2023

HM Revenue and Customs (HMRC) recently published the next stage of their consultation on the taxation of Decentralised Finance (DeFi) lending and staking. They are seeking the views of those who work in, and invest in crypto, on whether crypto specific rules should be introduced to cover DeFi lending and staking.

What does the consultation say?

HMRC appears to agree with tax and industry professionals, that the current rules do not reflect the commercial substance of the transactions and instead, they need to consider the economic ownership of the crypto asset rather than the legal/beneficial ownership when it comes to lending and staking.

We believe that this is the correct approach to DeFi lending and staking and provides not only the correct outcome from a tax perspective but also reduces the administrative burden for taxpayers. It is intended that the new rules would also apply to Centralised Finance (CeFi) provided by exchanges.

So, what are the proposed rules?

In summary the proposed new rules are that:

DeFi lending and staking transactions will be disregarded for Capital Gains Tax (CGT) purposes for both the lender and the borrower.
The sale of rights related to the lent or staked tokens will be seen as a disposal of the tokens to which those rights relate.
Any accrued DeFi return which accrued on the tokens prior to the sale of such rights is taxable on the lender at the time the rights are disposed of.
The buyer of rights to lent or staked tokens is treated as acquiring the lent or staked tokens.
The lender will be treated as having disposed of the staked or lent tokens if the borrower is not able to return the borrowed tokens. The disposal will occur at the point in time the borrower loses the ability to return them.

In essence, the lending and staking of crypto will not be taxable unless the borrower defaults. This is because the economic ownership, i.e., the benefit and loss from changing crypto values remain with the lender. Note that any DeFi returns received will continue to be taxable.

The proposal also suggests that all returns from staking and lending should be taxed to income, this would reduce the administrative burden on investors and simplify the tax rules.

It is expected that HMRC will not apply these rules retrospectively and as such for the time being we are bound by the current rules and any transactions entered into before the new rules are implemented will be taxed under the old regime.

Due to the overwhelming number of requests we are not accepting any more crypto enquiries at this time

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How we can help

We have an experienced team of crypto tax advisors familiar with the unique challenges relating to crypto trading and currency who can provide support with:

Calculating your taxable gains and losses
Your annual HMRC filing obligations
Undeclared crypto gains and disclosures
Tax planning to ensure that your cryptoassets are properly structured
Ensuring correct valuations are used for your cryptoasset disposals
Tax efficient structures for Non-UK domiciled individuals
HMRC tax disputes and investigations
Business start-ups in the cryptosphere

Need more advice from a Crypto specialist accountant?

We have a lot of information about the UK tax situation for Crypto and NFT on our website which you may want to read before getting in touch.

How we can help

We have an experienced team of crypto tax advisors familiar with the unique challenges relating to crypto trading and currency who can provide support with: