Tax reporting is set to get a lot more complicated for decentralized finance (DeFi) lenders and stakers in the U.K. Her Majesty’s Revenue and Customs (HMRC) has issued new guidelines for the DeFi sector, that puts digital tokens in the same bracket as property.
Ownership of assets
Under the new regulation, HMRC could consider lending digital tokens on platforms as disposal of ownership the moment they leave a digital wallet. Such decentralized finance transactions would come under the ambit of the capital gains tax.
This approach contradicts the basis on which investors conduct DeFi transactions such as staking. Investors lend tokens to validate transactions to platforms or the protocol with the understanding that the platform will return the tokens at a later date. The investors also receive rewards in the form of more tokens. HMRC, however, wants more transparency on whether the platform has any use of the lent tokens as collateral for other purposes during the stipulated period.
Revenue and capital
DeFi investors will also have to differentiate between revenue and capital earnings. The tax regulator wants more clarity if the earnings are pre-determined as part of an agreement or if the returns are speculative in nature. The former scenario would result in the earnings from decentralized finance transactions to be treated as revenue, while the latter case would categorize the returns as capital.
HMRC has also refused to treat the earnings from digital assets as interest. Digital tokens are not considered as currency or legal tender in the U.K. The new update is likely to force DeFi investors to report on hundreds of transactions.
Ian Taylor, executive director of U.K. Crypto, an industry body for the sector, said that the new updates are not aligned with the approach of other regulatory agencies for DeFi.