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cryptocurrency | accountingweb | HMRC Decentralised Finance Consultation
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HMRC proposes simplifying DeFi taxation

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There are few topics within the taxation of cryptoassets that are as confusing as how decentralised finance is taxed. However, there is change on the horizon with an HMRC consultation proposing new legislation to reduce the tax burden on investors.

9th May 2023
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In what is a positive step for the cryptoasset industry in the UK, HMRC released the long-awaited consultation document (condoc) proposing new legislation to simplify the taxation of certain decentralised finance (DeFi) activity and reduce the administration. HMRC will be one of the first, if not the first, tax administration to design and implement specific rules for the taxation of DeFi transactions. While the condoc focuses on individuals, HMRC states that it is aware there are similar issues for corporates and may introduce similar rules for them.

What is DeFi?

By way of a quick refresher, broadly DeFi lending and staking is where an individual will provide a token, say a bitcoin, to a lender (platform) for which they will receive a return (sometimes inaccurately called interest). The platform will then use that token as part of their lending business. 

It can be helpful to liken this to the activity of a bank. A person will deposit money, in practice lending money to the bank, for which they will be paid interest. The bank will then use it for economic activity such as lending to others at a higher rate than the interest paid to the depositor. DeFi lending is similar, except there is no money, no bank protections and myriad ways in which it can be done.

A further difference is that it is retail investors that are the main source of liquidity for DeFi platforms. When an individual lends cryptoassets to the platform this usually results in a change of beneficial owner of the cryptoasset, which is a disposal for tax purposes. Whereas, if the individual had lent stocks or shares, there are specific tax rules that switch off the transfer of beneficial ownership.

Economic substance

The condoc states it will “disregard from CGT [capital gains tax] any disposal of beneficial ownership that may happen when cryptoassets are staked or lent”. Further, by doing so the transactions will better reflect the “economic substance” of the transactions. This certainly removes one of the main tax concerns when tokens are lent to platforms. 

HMRC is also considering treating all returns on such DeFi transactions as revenue in nature and subject to miscellaneous income. While this simplifies tax treatment (since in some cases returns can currently be treated as capital in nature) this may lead to more tax to pay for many individuals.

However, in our view, the suggested amendments may not lead to the hoped-for reduction of administration. As mentioned above, DeFi lending requires individuals to provide the necessary liquidity. Under the proposals, if an individual gets their original collateral back there will be no tax liability, but this isn’t how most individuals interact with DeFi platforms so there will still be friction and record-keeping needed.

This is a positive step for the cryptoasset industry in the UK and will provide clarity and certainty for the sector. But is it the right step? As always the devil will be in the detail when the legislation is finalised.

Replies (12)

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By JustAnotherUser
09th May 2023 11:26

One small step but but the whole situation stinks in the UK....

While...

The UK Government sets out a plan to make the UK a crypto tech hub...
https://www.gov.uk/government/news/government-sets-out-plan-to-make-uk-a...

UK banks disagree...
Nationwide, HSBC, LLoyds, TSB, Starling, Natwest, Barclays, Santander, Wise, Monzo.... and more have either limited or banned transactions to CEX's
https://decrypt.co/122666/uk-crypto-crackdown-which-british-banks-buy-bi...

With CG threshold being lowered again April 2024 which coincides with the bitcoin halfling and suspected bull run, 2024 is going to be fun for tax payers, HMRC have some work to do as there maybe a hell of a lot more people needing to submit in 24/25 that wouldn't normally.

Change the rules all they want but the average Joe Bloggs still wont be making a submission, anyone with enough gains will welcome a better way to calculate tax and any suggested savings.

Thanks (1)
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By Hugo Fair
09th May 2023 19:16

What is this "cryptoasset industry" of which you speak, oh wise one?

Actually I'd be happy to have merely a short list of quantifiable benefits that it (even hopes to) bring to the population at large (or the country or the govt) - as opposed to a few wild west gamblers.

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Replying to Hugo Fair:
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By JustAnotherUser
10th May 2023 08:12

I don't understand something =/= it has no use.

I'm not going to go into great detail as its the same comments over and over "Ponzi this", "tulips", "what are the benefits" etc etc

Start from the beginning https://bitcoinwhitepaper.co/ then research some more.

I did paste more links but a) you wont read any of it and b) they're all a quick google search away.

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Replying to Hugo Fair:
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By dilfimour
10th May 2023 09:35

The "cryptoasset industry" are the business that operate in the sector.... Regardless of any perceived utility they exist. Other industries produce products that I personally, deem to have limited utility but that does not mean they do not exist or that a client may ask questions.

The article is to inform AccountingWeb readers of the proposed changes and, more importantly, how it may change the current position. I hope that some readers are now better informed if they have a question from a client. If I have only helped one reader I am happy. From that perspective it does not matter if there is perceived utility or not.

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Replying to dilfimour:
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By Hugo Fair
10th May 2023 18:38

Fair enough ... assuming that you're the author of the article (these avatars really don't help).

FWIW, and despite what JustAnotheUser says above, I am generally open-minded and regard any day in which I don't learn something as a wasted opportunity.

But it doesn't seem unreasonable to hope that you (or any other expert in the field) could take the time to explain some of the quantifiable benefits that it hopes to bring to the population at large.
Presumably you agree that anything that doesn't at least try to deliver benefits to more than a few selected individuals is doomed to a short shelf-life?

A professional adviser needs much more than a basic understanding of tax / law / accounting ... without an insight into the strengths & weaknesses of the business case they are in the invidious position of commenting on proposals/options that may contain pitfalls of which they are unaware.

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Replying to Hugo Fair:
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By JustAnotherUser
11th May 2023 08:32

There's a couple of distinctions to make...
HMRC efforts to generate more tax on crypto gains by trying to simplify the process… aimed at crypto owners, profits, tax etc.

UK government wanting to be a crypto tech hub, which IMO is about the business side, the venture capitalists, the startups, the technology and not necessarily the crypto owners that HMRC is working on... the trillions being invested globally, the 1,000s of employees, the patents, the tech.... that part which UK gov want a slice of on UK soil.

But if we start with the statements, you make....
-bring to the population at large.
No one states it’s for the majority, as of right now 5% give or take own crypto in the UK alone

-to deliver benefits to more than a few selected individuals
https://brokerchooser.com/education/crypto/crypto-countries
Who are these few you speak of? Why do you assume this?

-is doomed to a short shelf-life?
Bitcoin is now over 14 years old.
Yes there are companies like Terra-Luna, just like there was Pets.Com in the dotcom boom or all these other failures and fraudsters…
https://en.wikipedia.org/wiki/List_of_companies_affected_by_the_dot-com_...

I'm pressed to believe you have not searched any of the following...
"bitcoin benefits"
"crypto use cases"
"why is crypto so popular"
"how is bitcoin helping Africa"
"how has crypto helped Ukraine"
"why are millennials turning their back on traditional finance"
"benefits of blockchain"

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Replying to Hugo Fair:
Donald MacKenzie
By Donald MacKenzie
15th May 2023 09:50

I cannot see anything legal that can be done with a cryptocurrency that cannot be done using real currencies.

What is the point?

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Replying to Donald MacKenzie:
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By Hugo Fair
15th May 2023 12:18

A much snappier encapsulation of my point ... so why is it so hard for promoters to explain the benefits that currently remain unobserved by us?

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Replying to Hugo Fair:
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By JustAnotherUser
16th May 2023 15:32

we try, you just dismiss or don't understand them and just wish to compare it to tulips.
I guess after 14 years, a half a billion users and a trillion dollar industry is wrong and Hugo Fair is right.

I already know the reply will be "so you've still not given me an example" let's agree to disagree.

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Replying to JustAnotherUser:
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By Hugo Fair
16th May 2023 18:24

I'm happy to agree to disagree, if only because personal sparring does nothing for other readers.

However I'd suggest that a bit more evidence and a little less making things up (that's twice on this thread that you've thrown 'tulips' at me even though I never mentioned them) would be more illuminating.

Oh and you appear to have truncated your second sentence:
"I guess after 14 years, a half a billion users and a trillion dollar industry is wrong and Hugo Fair is right" (along with rather more than half a billion non-users and naysayers) ... but thanks for the endorsement. :=)

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Replying to Hugo Fair:
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By Hugo Fair
17th May 2023 00:52

BTW have you seen today's report by the Treasury Select Committee?

"unbacked crypto assets - typically cryptocurrencies with no fixed value - expose consumers to the potential for substantial gains or losses, while serving no useful social purpose.
These characteristics more closely resemble gambling than a financial service."

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Replying to Donald MacKenzie:
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By JustAnotherUser
16th May 2023 15:29

Try to send a family member In Gambia some money, remittance is a massive use case for crypto and driving adoption.

1.7 billion people around the world don't have bank accounts.

This took me 30 seconds on google.

The issue isn't your sight its your willingness to look.

Dismissals of the real-world utility of cryptocurrency are often based on the assumption that money works the same way around the globe as it does in the UK.

On the flip side, there's lots of things you can do illegally with money that you cannot do with crypto.

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