HMRC’s Controversial Stance on Crypto DeFi type yield generation activity

Our Head of Crypto, Louise Lane CTA FCA, unpacks this for you…

In February this year, HMRC released new guidance on Decentralised Finance: Lending and Staking, which despite the terminology actually applies to all lending and staking scenarios; regardless of whether or not it was via a decentralised or centralised platform. It has taken some time to digest and unpack this complex new guidance, but I have now updated Recap’s Cryptocurrency Tax Guide for UK Individuals with comprehensive analysis of the substantially different tax position resulting from this new guidance on crypto tax.

The revised tax position results in significant accelerated capital gains tax implications for investors generating a yield from their cryptoassets. However, this will only apply when there is a transfer of beneficial ownership to another party upon entering the yield generating activity. Deciding whether or not there has been a change in beneficial ownership is very complex and will require an examination of the contract/terms and conditions for each platform/protocol you are generating yield from.

This same HMRC guidance also confirms that crypto reward tokens received for yield generating activities (such as staking and lending) will not always be taxed as miscellaneous income. Although a 20% CGT (capital gains tax) rate on crypto rewards sounds much better than income tax at say 40%, there is a significant downside with the timing. Capital rewards are subject to CGT at the point of entering the yield generating activity, and then re-assessed for CGT upon receipt of the reward (usually on exit). Paying CGT on the estimated future reward at the time of locking up your crypto tokens in a staking protocol is very unattractive – especially where it is long-term for say 5 -10 years.

For more details on HMRC’s controversial ‘DeFi’ guidance on cryptoasset tax for yield generating activities please read my full article on this topic.