Have you sought to generate a yield from your cryptoassets, or perhaps considered doing so? 

Have you sought to generate a yield from your cryptoassets, or perhaps considered doing so?  If so, read on.  

In February this year, HMRC released new guidance on DeFi that has been viewed by many in the cryptoasset community as controversial. Following the initial feedback on this guidance, HMRC have asked for views to be submitted by 31 August 2022 from investors, professionals and other interested parties in a ‘call for evidence’.

Following this call for evidence, the government will publish a summary of responses together with details of its next steps.  The information received will be used to decide what action may be necessary to improve the taxation framework for DeFi lending and staking.

HMRC are looking for opinions from those who have participated in yield generating activities and those who have been put off from doing so, due to the current ‘DeFi’ guidance from HMRC on the tax consequences. They want to ascertain if the financial and administrative burdens, such as the professional fees and the time involved with calculating the tax position of DeFi activities, could be reduced with a change in legislation.

Where the DeFi activities are similar to those undertaken within traditional finance, the government also wants to know if the legislation can be better aligned with the underlying economics of the transactions and treat them both the same for tax purposes.

We want your views on the HMRC guidance and any changes that would make it easier to work out the tax position, so we can include them in the representations we will make to HMRC

DeFi is an umbrella term that refers to financial services that are provided using blockchain technology. This could include staking, lending or borrowing cryptoasset tokens; participating in a liquidity pool or using crypto as collateral for a loan.

Our analysis of the current HMRC DeFi guidance is set out in our previous blog. The HMRC guidance stipulates that each DeFi activity needs to be assessed, to ascertain whether there is a transfer of beneficial ownership to another party, upon entering the yield generating activity. Where there is a transfer, HMRC contend there is a disposal of the tokens transferred for capital gains tax purposes; both at the time of entry and upon exit. This can lead to a tax bill payable at a time when the tokens are locked away, with no ability to realise funds to meet the tax bill.

We are finding the determination of who holds the beneficial ownership to be a time-consuming task, with no clear cut answer in a many cases. It requires an in-depth examination of the contract/terms and conditions for each platform/protocol used to generate yield.

The government released a list of plans in April to make the UK a cryptoasset ‘powerhouse’. This is said to involve an overhaul on the tax system to make the UK tax system work more easily for cryptoassets.

A consultation was launched in May to give the Bank of England authority to appoint administrators to help insolvency arrangements for stablecoin users in financial difficulty.

Separately to this HMRC call for evidence, the Government’s Treasury Committee is undertaking an inquiry examining the potential risks and opportunities associated with the use of cryptoassets and distributed ledger technology for consumers, businesses and the Government. It will also look at their impact on social inclusivity and the optimal balance of regulatory change to offer protection without stifling innovation. Click here for more details and how to make present your views in this regard.

There are several indicators that the UK government are taking cryptoassets seriously and do not want to fall behind. Therefore, we think it is important to engage in the call for evidence as this is our chance, as one of the UK’s leading cryptoasset tax advisors, to have our say.

Wright Vigar and Recap will be responding to the HMRC call for evidence and would like to hear your views. If you have been affected or would just like to express your opinion on the current DeFi guidance and the changes you would like to see happen, we would encourage you to fill out our survey. Alternatively, if you would prefer to respond independently, it can be sent to financialproductsbai@hmrc.gov.uk.

Read Recap’s Cryptocurrency Tax Guide for UK Individuals here, written by Louise Lane, our Head of Crypto