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July 10th 2022

Cryptoassets: government launches new consultation

In April 2022, the government announced a package of measures designed to ensure the UK financial services sector remains at the cutting edge of technology, attracting investment and jobs and widening consumer choice. This included an intention to consider and, where appropriate, address concerns that have been raised by stakeholders about the tax treatment of decentralised finance (DeFi) loans and staking.

DeFi lending and staking encompasses a range of activities that reward users who deposit cryptoasset tokens into a pool or lend them to other individuals or platforms to earn passive income returns often described as interest.

What is DeFi lending and staking?

DeFi lending services allow cryptoasset owners to loan out their tokens, either directly to other individuals (‘peer-to-peer’) or indirectly through a platform, and receive a financial return often described as interest. A person may also seek to take out a loan of cryptoassets for which they will need to provide collateral. The borrower may then be able to sell or lend the borrowed tokens.

Additionally, cryptoasset owners (known in this context as liquidity providers) can provide their tokens to a platform to pool with those of other users (a ‘liquidity pool’). This provision of liquidity to a platform is known as ‘staking’ and allows the platform to perform other DeFi services with the pooled tokens. For example, the platform can transfer control of the tokens to other participants for a period of time and at a profit. To encourage cryptoasset owners to provide the platform with this liquidity, they will offer a financial return.

At the time of the staking transfer, the liquidity provider will usually receive a token from the platform that provides them with a right to demand an equivalent quantity of the original tokens at a future time as repayment of the staked tokens.

The taxation of DeFi lending and staking under existing law

The tax outcome for participants in DeFi activities is determined by the facts and circumstances, rather than the terminology used. It is therefore necessary to establish the legal substance of each transaction before applying the relevant tax law.

DeFi is an evolving area and, particularly in novel situations, it may be necessary to conduct an extensive factual analysis to determine the correct tax position, including whether there has been a transfer of beneficial ownership. In general, a transaction involving the lending or staking of tokens has three main elements that need to be considered for tax:

  • the lending of tokens or making the tokens available for staking
  • the return from the lending or staking activity
  • the repayment of the DeFi loan or the withdrawal of stake

Tax treatment arising from the lending of tokens or from making them available for staking

The tax treatment of lending or staking of tokens is determined by whether the beneficial ownership in the cryptoassets is transferred, which is generally determined by the terms and conditions of the lending or staking agreement.

If there is no change in beneficial ownership, then there are no tax consequences arising from this element of the transaction. For example, this will be the case when the platform holds the tokens on trust for the liquidity provider.

If the beneficial ownership is transferred, then there is a disposal for CGT purposes. This may be the case when the platform is not constrained in what it does with the tokens, including being able to sell them outright to a third party. Most staking results in the lender or liquidity provider receiving new tokens from the platform. When a disposal occurs, the lender or liquidity provider must calculate the difference between the value of the new tokens received at the time of lending/staking and that of the pooled average cost of acquiring the tokens that are disposed of to determine any gain/loss for CGT purposes.

Tax treatment of the return from staking and lending

DeFi market participants may receive a return for the lending or staking of tokens. The type of the return received determines the tax rules applicable. In general for the most common types of arrangements:

  • when the return is income in nature, it will be subject to Income Tax (or, for companies, to Corporation Tax as income) when the return arises - in general, the return will be income where it is calculated as a percentage of the lent or staked tokens, for example, a user stakes cryptoassets at a 5% per annum return for 2 years;
  • when the return is capital in nature, the actual return will be subject to CGT when it is received. Deciding whether a return is capital in nature can be a difficult question - in general, the return is capital if it is realised through the disposal of a capital asset or when the return is determined by the increase in the value of a capital asset.

Tax treatment of the repayment of the DeFi loan or of the withdrawal of the stake

When a loan is repaid, or the stake withdrawn, there may be tax consequences for the lender or liquidity provider. The tax consequences will depend on whether the beneficial ownership in the tokens was transferred at the beginning of the transaction.

If the beneficial ownership was transferred, there may be tax consequences. Where the staking resulted in the lender or liquidity provider receiving new tokens from the platform, there will be a disposal of those new tokens for the tokens being returned. This will generally give rise to a CGT gain, or loss, for the lender or liquidity provider calculated as the difference between the value in pounds sterling of the tokens when they were lent or offered for staking and their value in pounds sterling when they are withdrawn.

If the beneficial ownership in the tokens was not transferred at the beginning of the transaction, then there are no tax consequences arising from this element of the transaction.


As will be appreciated, determining the correct tax treatment of defi lending and staking activities can be very challenging, particular where the nature of the underlying transactions is opaque as a result of an absence of clear contractual documentation.

The government will use the information received from its call for evidence to decide what changes, if any, are needed to reduce administrative burdens and costs for taxpayers engaged in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.

HMRC would like to hear from investors, professionals and firms engaged in DeFi activities including:

  • technology and financial service firms
  • trade associations and representative bodies
  • academic institutions and think tanks
  • legal, accountancy and tax advisory firms

Respondents are asked to reply to this e:mail address.


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