The United Kingdom’s tax office, Her Majesty’s Revenue and Customs (HMRC) issued a controversial set of guidelines on Wednesday that could affect Decentralized Finance innovation (DeFi).
The amended rule focuses on how digital assets treated in the UK for DeFi lending and staking, as well as whether the returns or incentives from these activities taxed as capital or revenue. Because of the cutting-edge nature of DeFi, tax specialists confused about how the existing regulations applied to these services.
“Decentralised finance (DeFi) lending/staking of tokens is a continually growing area. Hence, it is impossible to list all of the instances in which a lender/liquidity provider gets a return. And the nature of that return”. Instead, some guiding concepts outlined,” according to the HMRC statement.
Sold for tax reasons and would be subject to Capital Gains Tax
Because digital assets aren’t considered currencies in the UK, but rather property for tax reasons, returns from staking and lending DeFi assets will not be classified as “interest,” according to the guidance.
The advice suggests that in many situations, this technique would signal that “beneficial ownership of those tokens” moved to the platform. Which could cause tax concerns for stakeholders. This would indicate that they were sold for tax reasons and would be subject to Capital Gains Tax.
The new restrictions, according to Ian Taylor, executive director of CryptoUK, will impose an “unnecessary barrier” on crypto investors. Which does not exist for stock market participants when lending shares:
“For the purposes of taxation, HMRC considers crypto assets to be property. This, however, is at odds with the current strategy of the UK government and other regulatory authorities. Such as the Treasury and the Financial Conduct Authority.”
Tax compliance complexity
The new standards, according to Taylor, impose “undue reporting obligations for consumers”. And “cause tax compliance complexity” by requiring investors to report on hundreds or even thousands of transactions.
“This is at odds with the Government’s declared goal of making the UK a more open and appealing investment. As well, innovation destination after Brexit,” he said.
Matt Hancock, the former Secretary of State for Health and Social Care and now a Member of Parliament (MP) in the United Kingdom, encouraged the House of Commons to pass progressive crypto legislation to make England the “home” of cryptocurrency last week.
HMRC drew out provisions for the introduction of a digital services tax on crypto exchanges operating in the UK in November of last year.