U.K. Tax Regulator Toughens DeFi Stance and Crypto Isn’t Happy

(Bloomberg) -- Getting to grips with crypto on your annual tax bill is already a tough nut to crack, but the U.K. tax authorities are about to make it even harder.

Her Majesty's Revenue and Customs updated its guidance for the treatment of crypto assets to include further information on lending and staking in decentralized finance on Wednesday, marking the first time it has made a foray into the nascent sector. Crypto investors can stake their tokens on blockchain networks to help validate transactions and earn rewards, usually also paid out in tokens.

DeFi, which allows users to trade, borrow and lend crypto assets without going through an intermediary, has attracted hordes of investors as a result of the high yields platforms can offer. However, the sector's lack of required documentation for anti-money laundering and clear governance structures has left regulators globally on edge.

HMRC said investors must consider the terms on which platforms offer the staking of crypto assets in DeFi, which could affect beneficial ownership. For example, if the platform has use of a person's staked tokens while they are put up as collateral or lent out, that could indicate beneficial ownership of those tokens has passed and must be treated as a disposal, which incurs capital gains tax.

Ian Taylor, executive director of industry trade body CryptoUK, said the update means HMRC's treatment of crypto assets as similar to property is “inconsistent” with that of other U.K. authorities, such as the Financial Conduct Authority and the Treasury.

“This treatment of crypto lending and staking creates an unnecessary burden for any crypto investor who will now be required to include details of any lent assets (in certain cases inaccurately determined to be ‘disposed') on their tax returns,” said Taylor in an emailed statement. He added that this could mean crypto investors will have to carry out additional reporting, “which could require individuals to report hundreds or even thousands of transactions”.

The updated guidance added that returns made by investors through staking or lending DeFi assets cannot be considered as interest, as crypto assets are not considered to be currency or legal tender in the U.K.

However HMRC cautioned that it is not possible to set out all the circumstances under which this guidance might apply, because “the lending/staking of tokens through decentralized finance (DeFi) is a constantly evolving area”. Taylor said CryptoUK plans to engage with the watchdog in response to the guidance.

The updates come as the U.K. grapples with how to better regulate crypto assets while the market continues to grow at pace.

The FCA issued a proposal last month to restrict marketing of crypto assets only to wealthy investors. Other rules remain at planning stages, while a program to register crypto-linked businesses has faced numerous delays.

Elsewhere, newer areas such as nonfungible tokens are gaining extra scrutiny from tax watchdogs. Investors in NFTs, which can range from digital artworks to pieces of land in the metaverse, face billions of dollars in taxes and rates as high as 37%, according to experts.

“The guidance highlights the issue around the fact there is no standardized operating model for DeFi lending platforms, making it necessary to consider the terms and conditions offered by the platform on which the tax treatment will follow,” said Ben Lee, a tax director specializing in crypto assets at U.K.-based independent accountancy practice PKF Francis Clark.

“If you are unaware of the terms and conditions on your platform of choice, it is recommended you check them as there may be unwanted tax complications,” he added.