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UK tax agency cracks down on rules around DeFi lending and staking

February 3, 2022 Coin Telegraph

“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," said the executive director of CryptoUK Ian Taylor

Her Majesty’s Revenue and Customs (HMRC), the U.K.’s tax agency, on Wednesday, has released a controversial set of guidance that could affect innovation in Decentralized Finance (DeFi).

The updated regulation focuses on the treatment of digital assets specifically for DeFi lending and staking in the UK, and whether returns or rewards from these services are deemed as capital or revenue for taxation purposes. Owing to the cutting edge nature of DeFi these services had fallen into a grey area with tax professionals unsure of how the existing rules apply.

“The lending/staking of tokens through decentralized finance (DeFi) is a constantly evolving area, so it is not possible to set out all the circumstances in which a lender/liquidity provider earns a return from their activities and the nature of that return. Instead, some guiding principles are set out,” the HMRC update stated.

HMRC has updated its guidance on the treatment of crypto and digital assets, specifically for decentralised finance (DeFi) lending and staking in the UK, significantly altering their classification and treatment. Full report and our response here - https://t.co/8XXD0bm34O pic.twitter.com/Q3N7La5FVX
— CryptoUK (@CryptoUKAssoc) February 2, 2022

The guidance outlined that returns via staking and lending of DeFi assets will not be treated as "interest" as digital assets in the UK aren’t considered currencies, but rather property for tax purposes.

However, this approach could create tax problems for stakers with the guidance suggesting that in many cases it would indicate that “beneficial ownership of those tokens” had been passed to the platform. This would mean they were disposed of for tax purposes and incur Capital Gains Tax.

Ian Taylor, executive director of CryptoUK asserted the new regulations would create an "unnecessary burden" for crypto investors that stock market investors do not face when lending shares:

“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”

Right,so if i have to pay taxes on staking, isn't that double taxing....Let's say i stake 200 000 pounds worth of crypto on 10% APY, that will be worth 20 000,so i will have to tax as i earn it and after that tax it again once i exchange it for fiat/different asset?
— Dalek Alpha (@vlad_ned) February 2, 2022

Taylor added that the new rules add “undue reporting requirements for the consumer, and create tax compliance confusion” as investors will have to report on 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,” he said.

Last week, former Secretary of State for Health and Social Care current U.K. Member of Parliament (MP) Matt Hancock urged the House of Commons to introduce progressive crypto policy to make England the “home” of crypto.

In November last year HMRC laid out regulations concerning the introduction of digital services tax levied on crypto exchanges operating in the UK

UK digital services tax targets crypto exchanges

November 29, 2021 Coin Telegraph

Coin Telegraph

Britain’s crypto exchanges will be levied with a 2% tax which is likely to be passed on to investors warned CryptoUK.

A recent update to Her Majesty’s Revenue and Customs (HMRC) regulations has introduced a digital services tax that will be levied on cryptocurrency exchanges operating in the United Kingdom.

Crypto exchanges in the UK will now have to pay a 2% digital services tax according to a Telegraph report. Britain’s tax authority, HMRC, does not recognize digital assets as financial instruments and therefore exchanges are not eligible for financial exemptions.

On Nov. 28, the authority included cryptocurrency exchanges under the Treasury’s tech tax. The digital services tax on revenue was introduced in April 2020 targeting social media and search giants such as Facebook and Google.

The latest blow to crypto exchanges is a result of the HMRC’s classification of crypto assets, as the regulator explained:

“There are a wide variety of crypto assets, each with different characteristics. It said that because cryptocurrencies do not represent commodities, financial contracts, or money, it is unlikely that crypto-asset exchanges can benefit from the exemption for online financial marketplaces.”

According to CryptoUK, the trade body representing the digital asset sector in Britain, the tax is unfair and is likely to be passed on to investors and traders.

Executive Director Ian Taylor stated that treating cryptocurrencies differently to other financial instruments such as stocks or commodities is detrimental to the crypto sector.

He added that it is another heavy blow to the industry following the arduous licensing system introduced by the Financial Conduct Authority (FCA) for exchanges. Since January, all UK-based crypto-asset companies have had to comply with AML (anti-money laundering) regulations and register with FCA.

The regulator imposed a ban on crypto derivatives in January, and in June, the FCA warned consumers against 111 crypto firms that had yet to register with it.

In April, Cointelegraph reported that HMRC was ramping up its efforts to snare crypto tax evaders and introduced explicit demands on details of digital asset holdings on self-assessment forms.

Britain’s tax authorities reportedly demanded that several crypto asset exchanges hand over details on customers from transactions and holdings in August 2019.

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