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New HMRC DeFi Guidance
Overview of HMRC Guidance on DeFi Lending & Staking published 2 February 2022.
Although the section on this new guidance in the HMRC Cryptoasset Manual is titled ‘Decentralised Finance: Lending and Staking’ it is clear from the contents and examples that it is intended to cover all lending and staking scenarios; regardless of whether or not it was via a decentralised or centralised platform.
There is a great deal of uncertainty as to when the changes come into effect from. HMRC’s guidance isn’t the law; it is their interpretation of the law. So if this new guidance from HMRC is a correct interpretation of the law, then it applies retrospectively to all prior transactions. This new guidance from HMRC is not a change in position, it is just them providing more clarity and guidance on the laws that were already in place.
Therefore, if upon reading the guidance you think your prior years’ tax returns were filed incorrectly, the onus is on the taxpayer to file amended returns for 2020/21, or a voluntary disclosure for earlier tax years.
There has been significant criticism about the damaging consequences of this HMRC guidance from the crypto community.
CryptoUK has formed a working group of tax professionals and barristers with the objective of lobbying the government to create new tax legislation specifically for cryptoassets. This aims to address the many problems with the current law governing the tax position of cryptoassets; particularly yield generating activity covered by this new HMRC DeFi guidance.
It is very positive that Economic Secretary to the Treasury, John Glen, has announced in April 2022 that the government agrees that the current tax legislation will need major surgery to make it work more easily for crypto. They will be engaging with stakeholders on the changes they want to make and are looking to resolve specific issues like the treatment of DeFi loans and staking. They are also setting out new legislation to see stablecoins recognised as a valid form of payment in the UK. Although this will be regulatory rather than tax legislation, there will be an impact on the tax position if stablecoins are recognised as currency.
Therefore, with an appetite from Government to introduce changes to the tax system for crypto (DeFi in particular) it is optimistic that the tax professionals can work with them to come up with something sensible which attracts crypto businesses and investors to the UK.
Therefore, the HMRC guidance published on 2 February 2022 regarding DeFi lending and staking may well change, evolve or be entirely re-written over time, depending on the progress of any new tax legislation. Drafting and enacting new legislation can be a long-winded time-consuming process and it may be a few years before anything changing this HMRC guidance is in place.