The United Kingdom government has proposed a new tax regulation that is expected to benefit decentralized finance (DeFi) users. The novel framework is a significant move away from the traditional stance and offers a more accommodating tax environment for crypto users. The local fintech industry has welcomed this change with open arms.
Tax Amplications on DeFi Transactions
The new tax policy proposed by HM Revenue and Customs (HMRC) suggests a unique approach to crypto taxation known as ‘no gain, no loss’. This protocol will be applicable when a token is loaned out and the same type of token is received in return. It also extends to borrowing arrangements and the transfer of tokens into a liquidity pool.
In contrast to the previous regime, the taxable gains or losses under the new proposal would only be calculated when liquidity tokens are reclaimed. The taxable amount will be calculated based on the comparison between the number of tokens a user has contributed and the number they receive upon redemption.
Currently, whenever a user deposits funds into a protocol, regardless of the reason, the transaction may attract capital gains tax. In the UK, capital gains tax rates can range from 18% to 32%, which fluctuates based on the specific action.
DeFi Community Reactions
Sian Morton, the marketing lead at a crosschain payments system called the Relay protocol, expressed her approval for the change. She referred to this new ‘no gain, no loss’ approach as a considerable advancement for UK DeFi users who make use of stablecoins against their crypto collateral. She also noted that this modified tax treatment brings the tax regulation closer to the actual economic reality of these interactions.
She also hailed this as a positive signal, indicative of the UK’s evolving stance on crypto regulation. Maria Riivari, a lawyer at the DeFi platform Aave, also commended the new regulatory change. She stated that it would bring clarity that DeFi transactions do not trigger tax until the tokens are physically sold off. Her statement creates optimism for users as it promises greater transparency and understanding in handling DeFi transactions.
A Global Benchmark
The change in policy is not only seen as a significant move locally but has also attracted the attention of overseas observers. Riivari suggested that other countries facing similar inquiries regarding their crypto taxation could learn from HMRC’s thorough approach.
Ongoing Discussions
It is important to note, however, that these changes have not been finalised. The HMRC continues to engage with relevant stakeholders to evaluate the merits of this proposed approach. Feedback from individuals, businesses, tax professionals, and representative bodies, including crypto exchange Binance, venture capital firm a16z Capital Management, and the self-regulatory trade association, Crypto UK, are currently under review.
The agency also stressed the importance of making legislative changes in relation to the rules governing the taxation of crypto asset loans and liquidity pools that would cover the range of transactions under these arrangements. This is to ensure that it will be viable for individuals to comply with the impending changes.
This move by the UK government is seen as a significant milestone in DeFi regulation. The proposed changes not only benefit local DeFi users but may also set an exemplary standard for other nations with flourishing crypto ecosystems looking to revise their taxation policies towards crypto users.
