HM Revenue and Customs Launches DeFi Tax Consultation Paper

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Entities participating in DeFi space have until June 22nd to submit their opinions about the tax bill.

The taxation arm of the UK Treasury, HM Revenue and Customs, is considering modifying the tax treatment of decentralized finance (DeFi) lending and borrowing activities and is seeking input from industry participants.

The consultation, which runs from April 27th to June 22nd, invites “investors, professionals and firms engaged in DeFi activities,” think tanks, and representative bodies, to share their opinion on the government’s suggested DeFi tax legislation.

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The new legislative alterations note that cryptocurrencies used in DeFi transactions wouldn’t qualify as a disposal for tax purposes, which typically triggers a Capital Gains Tax (CGT) event. Instead, a taxable event would occur when cryptocurrencies are used in non-DeFi transactions.

The consultation outlines specific criteria that a transaction must fulfill to be classified as a DeFi transaction, including the initial transfer of crypto assets from a lender to a borrower, or via a smart contract, with an obligation on the borrower to return the tokens. Moreover, the lender should retain the right to withdraw the same quantity of tokens initially lent or staked.

According to HM Revenue and Customs, the goal of the consultation is to create a framework that “better aligns” the taxation of cryptocurrency assets involved in DeFi lending and staking transactions while simplifying compliance for users. The consultation document states:

To reduce the administrative burden for participants, the new tax framework could treat all DeFi returns as being revenue in nature and charged to a new miscellaneous income charge specific for cryptoasset transactions.

This consultation represents the second phase in a five-step process that will eventually lead to legislation.

This development signals the UK government’s growing interest in the rapidly evolving DeFi landscape and its desire to create a more comprehensive regulatory environment.

On April 25th, UK’s Financial Conduct Authority (FCA) revealed that they are eager to collaborate with crypto companies to create the industry’s regulatory framework.