The UK government is seeking comments regarding amendments to current tax rules applied to lending and staking in Decentralized Finance (DeFi).
Currently, the HM Revenue and Customs (HMRC) has released an open consultation to receive comments from investors, professionals, legal accountancy, and tax advisory firms, which is expected to end on June, 22.
Interestingly, the consultation is the second phase in a five-step process that will include legislation development, implementation and monitoring, and finally reviewing the changes made. The first step began in July when the UK government asked for feedback on how to tax crypto asset loans and staking within the perimeters of DeFi.
Concerns Raised Regarding Current Tax Rules
The major issue that has been raised by industry and tax professionals is that current tax rules could lead could result in transactions being treated as disposals by the lender or liquidity provider, even if the effective economic ownership of the crypto assets is retained. Thus, resulting in tax outcomes that do not represent the underlying economic reality.
Ultimately, the consultation’s goal is to develop a framework that better balances the taxation of crypto assets used in DeFi loan and staking transactions, while also making it easier for users to comply with the regulations.
The Concept of Lending and Staking in DeFi
In Decentralized Finance (DeFi), lending and staking are two important concepts that allow users to earn passive income by providing liquidity to the ecosystem.
While lending refers to the process of supplying funds to a liquidity pool or a smart contract that pays interest rates to borrowers, staking refers to the act of holding or locking up cryptocurrency assets in a certain protocol or network in exchange for incentives.
UK’s Tax Rules on Crypto
In 2021, the government imposed a digital service tax on all crypto exchanges operating in the UK. According to reports, the exchange platforms were compelled to pay a 2% service tax.
Additionally, crypto mining and staking are both taxed activities in the UK. Thus, profits from these activities may be subject to income taxation.