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UK: Tax Regulator Updates Staking and DeFi Lending Guidance

Coindesk  | Sandali Handagama | Feb 2, 2022

HM revenue and customs tax regulator UK - UK:  Tax Regulator Updates Staking and DeFi Lending GuidanceHow proceeds from lending or staking are taxed depends on the nature of the returns, which could be hard to determine, UK's tax agency says.

Her Majesty’s Revenue and Customs (HMRC), the U.K.’s tax agency, has updated its guidance on the taxation of returns from decentralized finance (DeFi) lending and staking in proof-of-stake networks.

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According to the new guidance, published Wednesday, how a return from lending or staking is taxed depends on whether it is considered capital or revenue. But deciding if a return is capital or revenue is complicated, as the HMRC itself admits.

“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 update said.

The HMRC first published guidance on how returns from staking are taxed in March 2021. According to last year’s guidance, the taxation of staking activity depended on whether the activity amounted to a “taxable trade,” the wording almost identical to the rules laid out for taxing crypto mining.

In a statement published across multiple social media platforms, the digital assets trade association CryptoUK said the new guidance significantly alters the classification and treatment of DeFi lending and staking for tax purposes in the U.K.

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According to the new guidance, the return may be treated as revenue or capital based on a number of factors:

  • Whether the amount of the return was known at the time the agreement was made;
  • whether the return is paid periodically or upon repayment of the principal; and whether the period of the lending is short term or long term;
  • Another factor is how the return is realized: If it is realized through the disposal of a capital asset, it would indicate a capital receipt.

CryptoUK:

“This means that the transaction will be subject to Capital Gains Tax reporting at that moment (token leaves the user's wallet), even though control still lies with [users], and they expect that the asset is still theirs and will be returned at a point in the future,” the CryptoUK statement said.

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