HMRC has now published the outcome of its consultation on the taxation of decentralised finance (DeFi) lending and staking. The update gives a clearer indication of how HMRC may approach DeFi taxation in future legislation.
If you use platforms for lending, borrowing or providing liquidity, you will know how difficult it has been to apply the current rules. Many transactions that do not involve a genuine economic disposal can still trigger Capital Gains Tax calculations under the current rules.
HMRC’s latest update suggests a potentially simpler approach is being considered. In this article, we break down what HMRC said, the direction they are considering, and what it could mean for crypto users.
Contents
1. What the consultation was about
Under the current rules, many DeFi transactions are treated as disposals for Capital Gains Tax. These include:
- Lending or depositing tokens into a DeFi platform
- Providing liquidity to a pool
- Moving tokens into a smart contract and receiving an LP token in return
- Wrapping or unwrapping tokens in various protocols
The problem is that the economic reality of these transactions is not usually that of a disposal, but they are taxed as disposal due to a temporary loss of beneficial ownership. In most cases, users are simply locking tokens into a contract and will reclaim them later. Despite this, the rules can require a CGT calculation at the point of entry.
HMRC launched a consultation to determine whether a different approach would be fairer and more practical.
2. Key concerns raised during the consultation
The consultation responses highlighted several recurring concerns around complexity and compliance:
- The current rules are too complex
- There are too many artificial disposal events
- Tax should apply only when the user actually disposes of their underlying asset
- Placeholder, receipt or LP tokens should not trigger CGT
- A simpler rule set would improve compliance
HMRC acknowledged these concerns and set out a possible new direction.
3. The no gain no loss approach under consideration
HMRC is considering treating certain DeFi transactions as no gain no loss (NGNL) events. This would remove artificial CGT triggers and bring DeFi closer to how traditional lending arrangements are taxed.
Under this proposed approach:
- Depositing tokens into a DeFi protocol would not be a disposal
- Receiving a placeholder or LP token would not be an acquisition for CGT
- Withdrawing your tokens from the protocol would also be no gain no loss
- Your original tokens keep their original base cost throughout
- CGT would only apply when you genuinely dispose of your tokens
- Rewards and returns would generally be considered income, as they are now
In short, users would no longer be taxed for entering or exiting a DeFi position. Only real disposals would matter.
If implemented, the proposals could significantly reduce the number of artificial disposal events currently faced by DeFi users.
4. How this could affect crypto loans
Crypto lending is one of the clearest areas where the current rules produce dry tax charges. Many users do not feel they have disposed of anything when they lock tokens into a loan contract. A NGNL approach could reduce many of these issues.
If adopted:
- Posting collateral would not trigger CGT
- Borrowing against your crypto would not be a disposal
- If the loan proceeds are in crypto form, then CGT would only be in play if the individual disposed of those tokens.
Example of proposed new rules:An individual borrows 100,000 USDC and provides 1 Bitcoin as collateral. The individual immediately sells the USDC for fiat currency for £80,000.
When the time comes to repay the loan, the individual acquires 100,000 USDC for £75,000.
Under the new rules, there would be a capital gain of £5,000 based on disposing the loan proceeds for £80,000 when they cost £75,000 to acquire.
This approach would more closely align the tax treatment with the underlying economic position.
5. How this could affect liquidity pool activity
Liquidity pools are among the most complex areas of DeFi taxation today. Under the current rules, providing liquidity often counts as a disposal because you receive different tokens back e.g. stETH in exchange for depositing ETH. HMRC’s consultation outcome acknowledges this issue.
Under a NGNL model:
- Contributing tokens to an LP would not be a disposal
- Receiving LP tokens would not create a CGT event
- Exiting the pool would also be no gain no loss
- Your original tokens retain their original pooled base cost
- Rewards from the activity would still be taxed as income
- CGT applies only when the underlying tokens are ultimately sold
This could reduce the current issue of having to calculate gains or losses simply for entering or leaving a pool.
6. Cryptoccountant’s View
The proposed direction represents a potentially significant shift in HMRC’s approach to DeFi taxation. The current rules for DeFi create confusion, create taxable events without corresponding liquidity and produce outcomes that do not match the economic reality of how lending or liquidity provision works.
A no gain no loss model would:
- Reduce the number of artificial tax points
- Make reporting more achievable for everyday investors
- Bring DeFi taxation closer to traditional financial products
- Improve compliance by simplifying the system
There is still work to do. HMRC needs to define the scope clearly and provide examples that reflect real-world protocols. But the broad direction is positive. If implemented well, these changes could significantly reduce the compliance burden for UK DeFi users.
We will continue to monitor the next stages of HMRC’s work and publish updates as new information becomes available.
