UK clarifies tax treatment of staking and DeFi lending

The UK tax authority (HMRC) updated guidance on taxation of income from staking and lending through DeFi services.

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Under the rules, the tax on proceeds from these activities depends on whether they are considered capital gains or income. The department acknowledged that classification is a difficult task.

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“Lending/staking of tokens via decentralised finance is a continually evolving area. It is therefore impossible to determine all the circumstances in which a lender/liquidity provider earns profits from their activity and the nature of those profits. Instead, a set of guiding principles is laid out,” the document says.

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HMRC published guidance on staking taxation in March 2021. At that time the department stated that the tax depends on the presence of \”taxable trading\” in the activity.

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CryptoUK, the trade association for digital assets, said that the new rules bring significant changes to the classification and tax regime in the DeFi space.

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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

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Under the updated guidance, proceeds may be treated as capital gains or income on the basis of a number of factors, including:

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• whether the amount of proceeds was known at the time the agreement was concluded;
• whether the yield is paid periodically or after repayment of the principal;
• whether the lending period is short-term or long-term.

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HMRC also noted the process of realising yield — if this occurs through the liquidation of the underlying assets, it indicates capital gains.

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On that basis, CryptoUK suggested that HMRC may classify as a taxable disposal the transaction when a token leaves the user\’s wallet for lending or staking on a DeFi platform. At that moment it would be subject to capital gains tax reporting, even though the asset remains with the user and they expect its return in the future, the association noted.

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The HMRC guidance also states that there may be additional factors determining the nature of the proceeds, and all facts of the transaction must be considered.

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In CryptoUK CEO Ian Taylor\’s view, the new rules “add excessive reporting requirements and create confusion in tax compliance”.

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Earlier in 2021, HMRC began collecting data on customers of overseas cryptocurrency exchanges.

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