HMRC DeFi Manual Contradicts Government Approach To Crypto, Trade Body Says

February 4, 2022
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The UK's HM Revenue & Customs has updated its manual regarding the tax treatment of crypto-assets as used for lending and staking with decentralised finance (DeFi) platforms, in a move that some argue goes contrary to the existing government approach.

The UK's HM Revenue & Customs (HMRC) has updated its manual regarding the tax treatment of crypto-assets as used for lending and staking with decentralised finance (DeFi) platforms, in a move that some argue goes contrary to the existing government approach.

In its updated crypto-assets manual, the tax agency discusses its considerations with regard to crypto and digital assets used for DeFi lending and staking.

Crypto staking is the process of locking up crypto holdings in exchange for a reward or return.

The manual states that HMRC does not consider crypto-assets to be currency or money and the rate of return is not considered to be interest for tax purposes.

Consequently, any provisions in the Income Tax or Corporation Tax which apply to interest specifically will not apply to the return earned from crypto lending or staking. How the return is taxed will depend on whether the receipt has the nature of capital or revenue, which in turn depends on how the transaction is structured.

“There is no single operating model for DeFi lending platforms. This means that it will be necessary to consider the terms and conditions offered by the DeFi lending platform to understand the tax consequences,” the manual states.

Commenting on HMRC’s announcement, Ian Taylor, executive director of CryptoUK said: “HMRC treats crypto-assets as property for tax purposes. However, this is inconsistent with the approach currently being adopted by government and other regulatory bodies in the UK, including the Treasury and the FCA [Financial Conduct Authority], who regard crypto-assets as financial instruments and regulate them as in line with other financial services and products.”

For instance, crypto exchanges are required to register with the FCA and comply with anti-money laundering regulations.

According to the crypto association, the proposed guidance implies that a token that is lent or staked into a platform or protocol may be classed as disposal by HMRC for tax purposes at the moment the token leaves the user's wallet.

This means that the transaction will be subject to Capital Gains Tax reporting at the moment of lending or staking.

By contrast, CryptoUK said control still lies with the user at that point, and they expect that the asset is still theirs and will be returned at a point in the future. “HMRC however, appears to view this differently,” Taylor noted.

CryptoUK argues the manual creates an “unnecessary burden” for any crypto investor who will now be required to include details of any lent assets on their tax returns and will have to carry out additional reporting which could require individuals to report hundreds or even thousands of transactions.

“This is out of step with the government’s stated aim for the UK to be open and attractive as a destination for investment and innovation post Brexit,” Taylor stressed.

“This inconsistent approach by HMRC creates friction for crypto investors, adds undue reporting requirements for the consumer, and creates tax compliance confusion. Stock lending is not taxed in the same way, for example.”

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