On Tax Administration and Maintenance Day last week, HMRC have released a consultation 'The taxation of decentralised finance (DeFi) involving the lending and staking of cryptoassets'. It seeks views simplifying the tax treatment of certain DeFi transactions.

  • DeFi is an umbrella term to describe services akin to traditional financial services that are provided using distributed ledger technology.  
  • DeFi transactions may involve the pooling and lending of  ‘cryptoassets'  to individuals or entities to generate income returns often described as (but not taxed as) interest.

This consultation explores ways to work around the mismatch between the economics and tax treatment of such transactions.

Under current rules pooling or lending may result in a disposal for Capital Gains Tax (CGT) purposes and any returns made can be taxed as either capital or income.

HMRC now proposes that there will be no disposal until the owner of the cryptoasset disposes of their economic intrerest and that returns generated will be taxable as miscellaneous income.

The background to these proposals are found in ‘The taxation of Decentralised Finance involving the lending and staking of cryptoassets – call for evidence’That consultation proposed and sought views on, three options to help the tax treatment match the economics of DeFi transactions. HMRC will now persue the option to legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending: this will remove from the scope of CGT some lending and staking activities.

Gary Ashford, Deputy President of the CIOT, said:

“The taxation of cryptoassets is a real headache for the government, with issues around both the clarity of the rules and low levels of awareness among taxpayers about their obligations.

“So it is encouraging to read these proposals. They are in line with what we have been calling for which is for cryptoassets to be recognised as unique, requiring a specific and clear set of legislation for their taxation."

Consultation questions

This consultation seeks views on: 

  • Proposing a definition of DeFi transactions.
  • Proposing taxation provisions which will apply to DeFi transactions.

A transaction will be within the proposed provisions if:

  • There is the transfer of cryptoassets between a lender and a borrower.
  • The borrower has an obligation to return the assets to the lender.
  • The return of assets can be instigated by the borrower, the lender or after a pre-determined time.
  • The lender has the right to withdraw the same quantity of the same type of tokens as was lent.

The proposed provisions will:

  • Disregard, for tax purposes, the lending transaction for the borrower and lender.
  • Treat any sale of rights relating to the lent assets as a disposal of those underlying assets.
  • Subject the lender to tax on any DeFi returns accruing to the time of any disposal.
  • Treat the buyer of rights to lent tokens(cryptoassets) as acquiring those underlying assets.
  • Treat the lender as disposing of the assets if the borrower is unable to return them. The tax point will be the time at which the borrower cannot return them.
  • Consider treating all returns from DeFi transactions as subject to Income Tax.

The consultation seeks answers to a number of questions relating to these proposals, see Consultation Questions below.

Responses to the consultation can be made by email to This email address is being protected from spambots. You need JavaScript enabled to view it.

The consultation will close on 22 June 2023.

Consultation questions

Question 1:

Do you consider that the rules above are sufficiently wide to cover most DeFi lending and staking models available in the market? If not, please provide details of the models that would not be covered.

Question 2:

Do you consider that the rules above would give rise to any unintended consequences or significantly restrict the development of the DeFi lending and staking market? If so, please provide details.

Question 3:

Do you consider that the rules would be open to abuse?

Question 4:

Are the rights of the lender to receive the lent or staked tokens of a legal nature? Please respond to this question with reference to any specific DeFi models you have an involvement in, highlighting any legal uncertainties.

Question 5:

Other than (i) the sale of rights during staking or lending and (ii) the borrower not being able to return staked or lent tokens, are there any other situations in which the lender may cease to hold the right to receive back the lent/staked tokens?

Question 6:

Do you favour a change in the rules to always treat the DeFi return as being of a revenue nature? What are the pros and cons?

Question 7:

  1. Do you agree that the proposed treatment of DeFi transactions has been applied correctly in each of examples 1 to 5?
  2. Do you foresee any practical difficulties applying the proposed treatment to situations similar to those in these examples?
  3. Please provide any further examples of DeFi transactions that you think would be helpful, including an explanation of how the proposed tax treatment would apply.
  4. Please provide examples of any DeFi transactions where you consider it would be problematic to apply the proposed new rules, with an explanation. If you think a different treatment would be easier to apply, while retaining broadly the same level and timing of tax charges, please set this out.

Question 8:

  1. Do you think that the transaction in example 6 should be within the scope of the proposed tax rules for DeFi? On what principles have you based your response?
  2. If you think that this transaction should be within the scope of the proposed DeFi rules, how should they treat the economic conversion between the two types of token while the tokens are staked as a pair, given that crypto-to-crypto transactions are taxable?
  3. Noting that this transaction does not meet all the conditions for the proposed rules, how could those rules be modified to provide a fair outcome for this transaction?
  4. Do you foresee any difficulties for users who engage in these and similar transactions to establish the value of the DeFi return? If so, please provide examples where this may be an issue.

Question 9:

Do you have any general comments regarding the proposed tax framework for DeFi that you have not included in the previous questions?

Question 10:

What impact do you expect the proposals in this document, if implemented, to have on administrative burdens and costs for users of DeFi?

Question 11:

Are there any other impacts, benefits or costs arising from proposals in this document, if implemented?

Question 12:

How common is direct lending of tokens between two parties compared to the use of staking?

Useful guides on this topic

How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?
How do you tax Bitcoin? Are cryptocurrency or cryptoasset gains or profits, taxable? Can you obtain tax relief if you make losses on Bitcoin? Gains on transactions in cryptoassets are potentially taxable in the same way as other investments. 

How are Cryptoassets taxed in the UK?  At a glance (Freeview)
How do you tax Bitcoin? Are cryptocurrency or cryptoasset gains or profits, taxable? Can you obtain tax relief if you make losses on Bitcoin? 

External links

Open consultation: The taxation of decentralised finance (DeFi) involving the lending and staking of cryptoassets

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