UK Tax Regulator Updates Guidance on Staking and DeFi Lending

Time Stamp: February 3, 2022 9:22 AM
Source Node: 1165183

UK authorities have updated their crypto tax guidance to include provisions for staking and decentralized finance (DeFi).

In a new statement from Her Majesty’s Revenue and Customs – the UK’s main tax agency – the government body says that crypto investors have to determine whether their returns fall under “income” or “capital.” More specifically, HMRC clarifies that investors need to discern whether their “return was earned by the lender/liquidity provider or was the return realized from the capital growth of an asset owned by the lender/liquidity provider”.

HMRC notes that because of the complexity of DeFi systems, this may not always be clear, so the agency gives some factors for crypto investors to look at when determining their tax status. One factor, HMRC says, is whether the return to be received by the lender/liquidity provider was known at the time the agreement is made.

“If the return to be received has been agreed, for example 5% per annum, this would indicate a revenue receipt. If the return to be received is unknown and speculative (and could result in a loss from the activity), this would indicate a capital receipt.”

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In addition, HMRC asks investors to look at whether their returns were paid out periodically or throughout the period of lending/staking. The agency says that a one-off payment is more likely to have the nature of capital, while recurring payments are more likely to be income.

Executives from CryptoUK, the country’s ​​self-regulatory trade association for the industry, made a statement regarding the new updates.

Executive director Ian Taylor characterized the new tax guidance update as “inconsistent” with regulatory frameworks put forth by other authorities in the UK.

“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.”

Taylor noted that the nature of DeFi will probably mean that investors will have to report “hundreds or even thousands of transactions.”

HMRC also says that returns made through staking and DeFi lending can’t be considered as traditional “interest” since private digital currencies are not considered legal tender in the UK.

“The guidance highlights the issue around the fact there is no standardized operating model for DeFi lending platforms, making it necessary to consider the terms and conditions offered by the platform on which the tax treatment will follow,” Ben Lee, a tax director specializing in crypto assets at U.K.-based independent accountancy practice PKF Francis Clark told Bloomberg.

“If you are unaware of the terms and conditions on your platform of choice, it is recommended you check them as there may be unwanted tax complications,” he said.

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Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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