Our Response to the HMRC DeFi Crypto Tax Consultation

In addition to contributing to the CryptoUK response to the HMRC DeFi tax consultation we have collaborated with Recap our crypto tax software partner, to submit our own representations.

Highlights of our views on the consultation:

• We don’t think the examples provided by HMRC in the DeFi consultation accurately reflect the majority of market activity. They do not take into account transactions composed of multiple assets, nor do they consider part redemption of DeFi positions.
• We believe that the proposed ‘repo-like’ approach is not an adequate solution for the taxation of DeFi. The unique characteristics of cryptoassets and the DeFi sector necessitate a more tailored approach.
• We propose the development of an Asset composition No Gain No Loss approach to address these nuances and future-proof the tax treatment of these transactions. We have outlined how we believe this framework should operate to capture DeFi lending and staking universally, inclusive of liquidity pools.
• We disagree that all DeFi rewards be treated as income. We believe there are strong arguments for treating all rewards as capital, with a Nil acquisition cost; as detailed in our response to Question 6.  We propose the rewards be subjected to CGT at the time of disposal. We believe this will provide simplification, reduce the admin burden and better reflect the economic substance. There are many issues we think it will resolve; including removing the complexity of identifying the rewards received in a bundle with reclaimed tokens; being unable to obtain a reliable value of the rewards at the time of receipt; the need to identify the point of receipt; pricing volatility and low liquidity risk when providing for the tax bill on the income; and distortion of the market by tax influencing the investment decisions.
• We have asked HMRC to provide clarity on a taxpayer’s DeFi tax position for the tax years up to the introduction of this new legislation.