Why HMRC’s crypto tax DeFi proposals fall short of the mark

Read the latest article in the Tax Journal written by Dan Howitt of Recap.io (our crypto tax software partners), discussing the shortcomings of HMRC’s proposed crypto tax framework for cryptocurrencies, specifically focusing on decentralised finance (DeFi) transactions.

The article provides a summary critique of HMRC’s proposals; based on the detailed representations made by Recap and Wright Vigar in their joint response to the HMRC consultation. It argues that the proposed treatment of DeFi rewards as income and the application of repo-like rules, both fail to take into account the intricacies of the crypto market. With the rise of decentralised services like liquid staking and liquidity pools, which involve multiple assets and partial redemptions, the article highlights the urgent need for tax policies that accurately reflect the economic reality of DeFi transactions.

To address these concerns, the article suggests simplifying the tax process for rewards by subjecting them to capital gains tax (CGT) at the time of disposal, rather than taxing DeFi rewards as income at the time of receipt. This approach not only reduces administrative burdens but also aligns with the economic substance of DeFi activities. Additionally, it proposes an alternative framework for the tokens locked up in DeFi positions; based on asset composition, taking into account the type and quantity of tokens involved in DeFi transactions. This framework aims to accommodate the complexities of trading and ensure future-proof tax treatment for DeFi crypto activities.

Read the full article here