The UK Treasury is seeking advice on taxing DeFi staking and lending.
The proposed regulatory changes aim to simplify the way DeFi returns are taxed and reduce the administrative burden for taxpayers. The consultation, initiated on 27 April by the UK Revenue and Customs, will continue until 22 June. In this context, investors, professionals and companies engaged in DeFi activities, as well as representative organizations and think tanks will be asked to present their views on the DeFi tax application proposed by the government.
Consultation Aims to Create DeFi Framework
The taxation of lending and borrowing in decentralized finance (DeFi) protocols could soon change, as the Treasury’s taxation arm seeks ideas for a possible new regime.
According to the proposed law changes, crypto used in DeFi transactions will not be considered a divestiture or sale for tax purposes that typically trigger a Capital Gains Tax (CGT) process. Instead, CGT will be applied and taxable when cryptocurrencies are disposed of in a non-DeFi transaction.
According to the consultation, for a transaction to be considered a DeFi transaction, it must meet certain criteria.
Specifically, it requires the initial transfer of crypto-assets from a lender to a borrower, or via a smart contract, in which he is obliged to return debt tokens. In addition, the lender must have the right to withdraw the same amount of tokens originally loaned or staked.
The purpose of the consultation is to establish a framework that determines the taxation of crypto assets used in DeFi lending and staking, making it easier for users to comply with regulations.
Consultation is the second phase of a five-stage process, which will be followed by the drafting, implementation and monitoring of legislation and ultimately the review and evaluation of change. The British government took the first step of the process in July by requesting feedback on the taxation of crypto-asset loans and staking in the context of DeFi.
It was reiterated that, in addition to simplifying the administrative process, reducing costs for taxpayers participating in DeFi is the main goal, while at the same time exploring how tax enforcement can better reflect the economic essence of these transactions.
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