The UK Treasury has announced plans to launch a consultation on how decentralized finance (DeFi) activities should be taxed. According to reports, the government believes that DeFi is an increasingly important sector, but has concerns that it may be used to avoid tax or hide illicit activities. As such, the consultation will reportedly aim to address these issues and ensure that the sector is subject to fair and transparent taxation. The move comes amid a wider push by governments around the world to regulate cryptocurrencies and digital assets.
The United Kingdom is set to make changes in the tax treatment of decentralized finance (DeFi) lending and staking. HM Revenue and Customs, the country’s taxation division, has released a consultation document seeking views on modifying the tax treatment of DeFi lending and staking. The final decision on whether to proceed with legislative changes will be made after the consultation process. This is the second stage of a five-step process that includes drafting legislation, implementing and monitoring, and ultimately reviewing and evaluating the change.
The consultation aims to create a tax regime that aligns the taxation of crypto assets used in DeFi lending and staking transactions with the underlying economic substance while reducing the administrative burden on users. The government seeks to establish clear tax and regulatory treatment of the field to position the country at the forefront of safe, sustainable, and rapid innovation in crypto assets and blockchain technologies.
The tax authority has called on a range of stakeholders to submit their views on the matter, including investors, professionals, and firms engaged in DeFi activities, technology and financial service firms, trade associations and representative bodies, academic institutions and think tanks, and legal, accountancy, and tax advisory firms. All views must be submitted by 22 June 2023.
The proposed legislative modifications state that the crypto used in DeFi transactions would no longer be treated as a disposal for tax. Instead, Capital Gains Tax (CGT) would apply when the crypto assets are economically disposed of in a non-DeFi transaction.
In addition to the proposed tax changes, the UK is also planning to impose a regulatory framework on the crypto industry in the next 12 months. According to Economic Secretary to the UK Treasury, Andrew Griffith, the regulation will foster the development of the asset class by turning the Kingdom into a global cryptocurrency hub.
Investors must prepare for potential changes in tax laws and regulation regarding DeFi activities in the UK. The proposed tax changes seek to reduce the administrative burden on users while aligning the taxation of crypto assets used in DeFi lending and staking with the underlying economic substance. Submitting views on the matter can help shape the outcome of the consultation process.