The tax treatment of borrowing and lending in decentralized finance (DeFi) protocols could change soon in the UK, as the Treasury’s tax division is seeking views on a potential new regime.
A consultation conducted on April 27 by HM Revenue and Customs will run until June 22 and asks “investors, professionals and companies engaged in DeFi activities”, together with representative bodies and think tanks, to submit their views on the government’s proposed tax treatment for DeFi.
According to the proposed legislative changes, cryptocurrencies used in DeFi transactions would not be treated as a disposal for tax purposes, which typically triggers a Capital Gains Tax (CGT) event.
Instead, the CGT would apply – and a taxable event would occur – when the cryptocurrencies were disposed of in a non-DeFi transaction.
According to the query, a transaction must meet certain criteria to be considered a DeFi transaction.
Specific, it must involve the initial transfer of crypto assets from a lender to a borrower, or through a smart contract, and the borrower will be obligated to return the tokens.
HMRC Update on DeFi Guidance
I will take time to digest. But here are some pieces:
1. Clear preference to options
2. They agree it needs to be changed
3. Another call for evidence #crypto #tax #accounting #hmrc https://t.co/O6VrTxNUCk— Jme – UK Crypto Accountant (@CryptoTaxJme) April 27, 2023
HMRC update on DeFi guidance. It will take me a while to digest this. But here it is:
1. There is a clear preference for options
2. They agree that it must be changed
3. They make another request for evidence
Besides, the lender should be entitled to withdraw the same amount of tokens that were initially loaned or staked.
The goal of the consultation is to establish a framework that “better aligns” the taxation of cryptocurrency assets used in DeFi lending and staking transactions, while making it easier for users to comply with regulations. The text states:
“To reduce the administrative burden for participants, the new tax framework could treat all DeFi returns as income in nature and charged against a new miscellaneous income charge specific to crypto asset transactions.”
Consultation is the second stage of a five-step process, followed by drafting legislation, implementation and monitoring, and finally review and evaluation of change.
The British government took the first step in the process in July, by requesting opinions on the taxation of lending and staking of crypto assets in the context of DeFi.
The simplification of the administrative process was once again pointed out as the main objectiveas well as reducing costs for taxpayers participating in DeFi, while exploring how the tax treatment could better reflect the economic substance of these transactions.
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