The UK has proposed a new tax framework designed to ease the burden on decentralized finance (DeFi) users, allowing capital gains taxes on crypto lending and liquidity pool activity to be deferred until the underlying tokens are sold. The move has been welcomed by the local industry.
On Wednesday, HM Revenue and Customs (HMRC) outlined a “no gain, no loss” approach for DeFi, covering scenarios such as lending a token and receiving the same one back, borrowing arrangements, and depositing tokens into a liquidity pool. Taxable gains or losses would only be calculated when liquidity tokens are redeemed, based on the difference between the number of tokens received and the number initially contributed.
Under current rules, any token deposit into a protocol may trigger capital gains tax, which in the UK can range from 18% to 32% depending on the transaction.
Positive signal for UK crypto regulation
Sian Morton, marketing lead at cross-chain payments platform Relay Protocol, called HMRC’s approach “a meaningful step forward for UK DeFi users who borrow stablecoins against their crypto collateral, aligning tax treatment more closely with the actual economic reality of these interactions.” She described it as “a positive signal for the UK’s evolving stance on crypto regulation.”
Maria Riivari, a lawyer at DeFi platform Aave, added that the framework “clarifies that DeFi transactions do not trigger tax until tokens are truly sold,” noting that other countries grappling with similar questions may look to HMRC’s approach as a model, given the depth of research behind it.
Aave CEO Stani Kulechov called the proposal “a major win for UK DeFi users who want to borrow stablecoins against their crypto collateral.”
DeFi tax overhaul still under review
The proposal is not yet finalized. HM Revenue and Customs (HMRC) said it is continuing to consult with stakeholders “to assess the merits of this potential approach, and the case for making legislative changes to the rules governing the taxation of crypto asset loans and liquidity pools.”
The agency added that it aims to ensure the framework “would cover the range of transactions that can take place under these arrangements and be practical for individuals to comply with.”
During the initial consultation, HMRC received 32 formal written responses from individuals, businesses, tax professionals, and representative bodies, including crypto exchange Binance, venture capital firm a16z Capital Management, and the self-regulatory trade association Crypto UK.
