Why The UK Opened A Consultation On Crypto, DeFi, And Staking Taxation

The U.K. HM Revenue & Customs (HMRC) agency opened a consultation on the state of crypto taxation, specifically for decentralized finances (DeFi). This call for evidence will have an 8-week duration from today July 5^th until August 31^st, 2022 and could result in significant changes to the DeFi tax structure.

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The consultation follows an announcement from the government agency on their “next steps for the government’s FinTech Sector Strategy”. This initiative aims at providing more regulatory clarity around crypto and new technologies to “place the UK at the forefront of” financial innovation.

The government agency claims there are stakeholders and investors that asked to review “issues” regarding the taxation of DeFi activities. This informal discussion led to this initiative. The consultation’s scope is limited to lending and staking in DeFi platforms.

The HRMC stated the following on their objectives:

(…) the government is interested in ascertaining whether administrative burdens and costs could be reduced for taxpayers engaging in this activity, and whether the tax treatment can be better aligned with the underlying economics of the transactions involved.

In that sense, the government agency might apply changes to its crypto tax structure for DeFi lending and staking, if there is enough evidence to back it. Investors, institutions, and other entities engaging in the sector can send an email to the following address [email protected] and reply to a series of questions provided by HMRC.

In total there are around 10 questions designed to get information on the DeFi lending and staking sector. This includes data on the number of people using these platforms in the U.K., what protocols they are using, and the duration of a transaction.

In addition, the government agency is trying to determine if the current tax structure is pushing people away from DeFi platforms. As mentioned, one of their main interest seems to attract capital, investors, and companies from the crypto industry.

What’s The Current Tax Law On Crypto In The UK?

Therefore, it is paramount for the agency to calculate the percentage of transactions subject to taxation under the current treatment and if people really want to change it. The HMRC said:

(…) the government will use the information received from this call for evidence to decide what action, if any, may be necessary to improve the taxation framework for DeFi lending and staking.

Under the current law, someone could be subject to taxation if they are repaying a loan or withdrawing their funds from a staking platform, or if the funds are transferred from one person to another. However, the government agency acknowledged that DeFi is “novel” and thus:

(…) it may be necessary to conduct an extensive factual analysis to determine the correct tax position, including whether there has been a transfer of beneficial ownership.

The UK government body claims they are trying to create regulatory and tax clarity. This would place the country in contrast with many jurisdictions around the world, including the United States.

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At the time of writing, Ethereum (ETH) trades at $1,100 with a 2% loss in the last 24 hours.