The UK is deferring the DEFI tax bill

HMRC scraps the paper-gain tax on DeFi deposits

The UK is overhauling how decentralized finance activities are taxed, introducing a framework that delays capital gains tax (CGT) on qualifying crypto lending and liquidity pool transactions. The reform, announced by HMRC, aims to better reflect how these arrangements function economically rather than treating every transfer of cryptoassets as a taxable event.

Depositing cryptoassets into DeFi lending protocols and liquidity pools will no longer count as a taxable disposal, deferring any CGT until an investor makes a genuine economic disposal of the assets. The change, set out in a policy paper published Monday, takes effect from 6 April 2027 and will amend the Taxation of Chargeable Gains Act 1992.

Under HMRC's 2022 guidance, moving tokens into a DeFi arrangement could itself be a disposal, leaving users facing capital gains tax on paper before they had sold anything. Stakeholder feedback flagged that this produced disproportionate administrative burdens, and the new rules are meant to align the tax with the economics of the transactions.

Around 700,000 UK taxpayers could be affected by the changes. The shift caps a multi-year process, running from a 2022 call for evidence through a 2023 consultation to a summary of responses at Budget 2025.

Not a free pass, and the draft law is still to come

Rewards earned through lending protocols or liquidity pools will continue to be taxed under existing income tax rules when received. Once investors eventually sell, exchange, or otherwise economically dispose of their cryptoassets, capital gains tax will apply under the normal rules. The changes therefore alter when tax is paid rather than eliminating tax liabilities altogether.

Standard CGT rates of 18% for basic-rate and 24% for higher-rate taxpayers will still apply when assets are eventually sold, swapped, or used as spending. The measure's final costing still needs certification by the Office for Budget Responsibility, and it will not take effect until April 2027, giving UK crypto users and the protocols competing for them more than a year to adjust.

@StaniKulechov, founder of DeFi lending protocol Aave, called the approach "the right direction," arguing that any other treatment would have saddled taxpayers with heavy paperwork. He cast the outcome as evidence that industry feedback can shape policy, likening it to industry influence on a £20,000 cap on individual stablecoin holdings, and said the growing body of DeFi tax rules showed the sector maturing.

HMRC: Tax treatment of Cryptoasset Loans and Liquidity Pools (GOV.UK) | The Block: UK HMRC adopts no gain, no loss tax treatment for crypto lending | Decrypt: UK to Defer Capital Gains Tax on DeFi Lending, Liquidity Pool Deposits