UK’s tax agency, on Wednesday, published an updated guidance on the taxation of gains on DeFi lending. The updated guidance also included new norms for taxation of gains in staking in PoS (Proof of Stake) networks.
The lending/staking space is inherently always in a state of flux. New developments cause this space to be constantly evolving. Hence, UK’s tax regulator said that it was not possible to issue firm regulations for the space. Hence, they were only issuing guidelines and principles which would apply to taxation in the space.
HMRC Guidance
In March 2021, the tax regulator first published the guidelines for the taxation of gains from staking. In the guidance published last year, taxation on staking was based on whether it was a taxable trade or not. However, according to industry analysts who follow industry-related developments closely, this year’s guidance alters the existing principles. The modified guidance is similar to the rules that are applicable for taxes on crypto mining.
The new principles enunciated allow the gains to be treated as either revenue or as capital. It would depend on factors such as periodic payment of returns, prior knowledge of the quantum of return, or if the lending period is for the short/long term. Any gains obtained by the sale of a capital asset will be treated as capital.
Such transactions will attract capital gains tax. As per the new guidelines, users can decide on the nature of return accrued from lending/staking. If the return is periodic and pre-defined, it will be treated as revenue. However, if it is speculative, it will be treated as capital return.
Industry analysts feel that the new requirements place added reporting and compliance burdens on the consumer. The regulator has added that in the event of any confusion, the case can be referred to them for guidance.
