The UK is getting closer to finalizing its tax framework for decentralized finance (DeFi), as the tax authority HM Revenue and Customs (HMRC) has just proposed a new proposal to defer Capital gains tax on crypto transactions such as lending Token, providing liquidation , or using stablecoins as collateral. As described, users only have to pay tax when they actually receive the original Token , instead of when they deposit assets into the protocol as before. This is welcomed by the UK crypto community as a notable reform, as previously any act of transferring Token into a DeFi protocol could be considered a taxable transaction with a tax rate of 18% to 32%.
In the proposal, HMRC calls this a “no gain, no loss” approach to transactions such as lending Token and receiving the same Token back, collateralizing assets to borrow stablecoins, or transferring Token to liquidation pools. Taxable gains would only be calculated when users withdraw liquidation Token and receive the assets back, based on the difference between the amount of Token returned and the Token originally deposited. Industry players say this more closely reflects the true economic nature of DeFi interactions, which are more about temporary exchanges than asset sales.
Sian Morton, head of marketing at Relay Protocol, a cross-chain payments platform, said that HMRC's new approach is a significant step forward for DeFi users in the UK, especially those borrowing stablecoins against crypto assets. She called it a positive sign as the UK takes a clearer stance on crypto regulation, especially as Europe and the US ramp up regulatory demands.
AAVE platform lawyer Maria Riivari also said the proposal would bring much-needed transparency: DeFi transactions would not be considered taxable events until users actually sell their crypto assets. According to her, many countries that are struggling with how to classify on-chain transactions may XEM to the UK as a reference model, as the proposal shows that HMRC has done in-depth research on DeFi mechanisms instead of applying rigid rules like in traditional markets. AAVE CEO Stani Kulechov also called this a “big win” for users in the UK, especially those who want to optimize Capital flows with stablecoins.
