Cryptoasset DeFi Lending & Staking Legislation

Cryptocurrency has continued to grow in popularity since its invention in 2008 and in recent years HMRC has been reviewing how to deal with its taxation. There is a commonly believed myth that any gains made from cryptocurrency are tax free – sorry to be the bearer of bad news but this simply isn’t true!

The taxation of cryptoassets can be very complex and brings with it many grey areas, which makes reporting gains a minefield for many. HMRC has recently updated its guidance on decentralised finance (DeFi) lending and staking – something that only adds further confusion.

In this blog, we’ll aim to clear up some of this confusion, provide you with an overview of the new guidance and point you in the direction of where you can get help working out your cryptoasset tax requirements.

How cryptoassets should be taxed

The myth that cryptoassets are tax free seemed to stem from the view that purchasing and selling cryptocurrency was similar to gambling. However, HMRC actually likens it to the purchase and sale of stock instead. This means that you’re required to pay tax on any gains. But what type of tax does it fall under? It can often be tricky to decipher.

Here in the UK we don’t have a tax that’s specific to cryptocurrency, so existing tax rules are applied. It’s understood that most cryptocurrency activity will be seen as an investment and therefore subject to Capital Gains Tax (CGT). There are, however, instances where activity may be viewed as trading and therefore subject to Income Tax, but this is seen as incredibly rare.

New guidance on DeFi lending & staking

Because of its fast-paced nature and the constantly-evolving technology associated with DeFi, the taxation of such has often fallen into an area of uncertainty. HMRC released a new set of guidelines back in February this year which looks to tackle the taxation issues surrounding DeFi lending and staking. However, the rather controversial set of guidance has been widely criticised for having the potential to cause further confusion, complication and disruption. You can find the government guidance here.

According to this new guidance, HMRC will treat a token that has been either lent or staked into a platform or protocol to have been ‘disposed of’ for tax purposes. And because of this, the individual will be expected to report CGT as soon as this token leaves their pocket (despite the fact that the token remains in their control), leading to a whole host of reporting responsibilities and the risk of double taxation and dry tax charges.

As part of a statement reflecting on this new guidance, CryptoUK’s Executive Director Ian Taylor argues: “This treatment of crypto lending and staking creates an unnecessary burden for any crypto investor who will now be required to include details of any lent assets (in certain cases inaccurately determined to be ‘disposed’) on their tax returns and will have to carry out additional reporting which could require individuals to report 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.”

Where to get further help

It’s fair to say that these new rules will only continue to cause uncertainty on how and when you’re liable for tax on your cryptoassets. It can be a very tricky area to navigate and we highly recommend you speak to an accountant if you have a cryptoasset portfolio. Our team of knowledgeable and professional accountants are highly experienced in the world of cryptoasset taxation, so get in touch today and we’ll guide you through the complex legislation and ensure your portfolio is not only tax compliant but also tax efficient.