UK Government Updated Crypto Tax Rules On Staking, DEFI

The UK government updated crypto tax rules to govern decentralized finance and staking as we are reading further in today’s latest crypto news.

The UK Government updated the tax rules for crypto payments and rules that govern decentralized finance and crypto staking. Her Majesty’s Revenue and Customers noted:

“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.”

As a result, HMRC set up a series of guiding principles that act as guidance on determining the nature of return related to DEFI or staking which should be classed as an income or capital gains:

“That is, was the return earned by the lender/liquidity provider by providing a service to the borrower/DeFi lending platform, or was the return realized from the capital growth of an asset owned by the lender/liquidity provider?”

HMRC published four distinct points that were designed to assist individuals in determining the nature of the return. First, whether this return recieved by the lender or provider is known at the time the agreement is made, and if it is known, it will indicate a revenue receipt but if it is uknown, it will indicate a capital receipt. If the return is realized via the disposal of a capital asset, it indicates a capital receipt and in contrast, should the return be paid by the DEFI lending platform to the lender or provider, the return should be classified as a revenue receipt. One-off payments are more likely to have the nature of capital while recurring payments are likely to have a nature of an income. HMRC cites whether the period of lending is fixed or indefinite, or short and long term as another variable that determines the nature of the return.

Ian Taylor as an executive director at CryptoUK already criticized HMRC’s stance:

“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, who regard crypto assets as financial instruments and regulate them as in line with other financial services and products”

He added that the approach by the HMRC creates friction for investors and adds undue reporting requirements for the consumers while also creating tax compliance and confusion. The FCA does regulate crypto services and already warned that if something goes wrong, individuals will have access to the Financial Services Compensation Scheme or another Financial service. The new regulatory powers that were introduced allowed the FCA to supervise how crypto businesses manage the risks of money laundering and counter-terrorism financing.
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