DeFi lending and staking – updated HMRC guidance issued

DeFi lending and staking is the subject of the latest update by HMRC, as it adds more detail to its guidance on the treatment of crypto and digital assets.

HMRC published its consolidated advice on cryptoassets on 30 March 2021. This recent advice, published on 02 February 2022 and including DeFi lending and staking, is the latest in many updates since the original publication.

What is crypto staking and lending?

In short, staking crypto is leasing it to the blockchain, whilst lending crypto is leasing it to a borrower. Typically, this is to earn interest, which is usually paid out in the form of the crypto which is staked or lent.

What does this new guidance on DeFi staking and lending mean?

The updated guidance from HMRC puts emphasis on the tax treatment of Decentralised Finance (DeFi) lending and staking for UK tax residents. It sets out HMRC’s view on whether returns or rewards from staking /lending is deemed as capital or revenue for tax purposes.

In its commentary HMRC explain that, as lending or staking of tokens through DeFi is a constantly evolving area, it is not possible for HMRC to set out all the circumstances regarding how a lender/liquidity provider could earn a return from these activities and the nature of those returns. It does, however, provide guiding principles.

Under HMRC guidance, returns from the staking and lending of DeFi assets are not to be treated as interest. (Note that digital assets are classed as property in the UK for tax purposes, rather than currency).

This means that when a token is staked or lent into a platform or protocol, it could be classed as a disposal for tax purposes the second it leaves a wallet. The implication of this is that, as a taxable event, this transaction will be subject to capital gains tax, and may need to be reported to HMRC.

This is despite the asset still being owned by the user, who retains control and has the expectation that their asset will be returned to them. It is possible this view will be challenged.

The importance of up-to-date advice

The update by HMRC explains that there could be additional factors that determine the nature of a return, which emphasises the need to obtain all the facts relating to a transaction before a conclusion can be reached as to the nature of a return.

If a crypto investor has difficulty determining the nature of the return, HMRC requests that they refer the case for advice following general guidance.

How crypto is taxed in the UK can be complicated with legislation evolving at a fast pace. Since HMRC issued its manual on 30 March 2021, it has already been updated 10 times, this 2 February 2022 update being the latest.

Penalties for avoiding tax in the UK can be severe. HMRC can investigate 20 years back into a person or business’s tax activity, where it believes there has been deliberate evasion. Interest is usually due on any tax outstanding, as are penalties, which can be considerable.

Contact Alexander & Co – crypto tax specialists including DeFi staking and lending

Alexander & Co is one of the UK’s leading advisors on crypto tax. As a firm of Chartered Accountants and Chartered Tax Advisors, we are at the forefront of evolving legislation and understand how tax applies to crypto in the UK.

We work with a wide range of clients in the crypto industry, including individual investors and traders. We also work with crypto businesses, including NFT creators and businesses that invest in crypto as a secondary activity.

For up-to-date advice and to find out more about how we can help you, please complete the form below, email or phone our office on 0161 832 4841.

Further useful reading on crypto tax:

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