The UK has proposed a tax framework that adopts a ‘no gain, no loss’ system for decentralized finance transactions. This would eliminate capital gains tax on deposits made to crypto lending platforms.

The approach suggests that taxable events related to crypto lending and liquidity pools would be deferred until the actual sale of tokens. The initiative has been praised by industry insiders as a positive development for UK DeFi participants.

Moreover, HM Revenue and Customs (HMRC) introduced this model, which would address scenarios where tokens are lent and returned, borrowed, or used in liquidity pools.

Taxable gains or losses would be assessed when liquidity tokens are redeemed, based on what users receive back relative to their initial contributions. Currently, depositing assets into a DeFi protocol could incur capital gains tax, which in the UK ranges from 18% to 32%.

Positive Outlook for Crypto Regulation

Sian Morton, the marketing lead at Relay protocol, stated that this new approach represents a significant advancement for DeFi users, aligning taxation more closely with the real-world dynamics of such financial interactions.

Maria Riivari, a lawyer associated with Aave, expressed that this change would clarify that DeFi activities do not trigger tax until tokens are definitively sold. According to her, other nations grappling with similar regulations might want to consider the detailed research that underscores HMRC’s proposal.

Aave’s CEO, Stani Kulechov, regarded the proposed regulations as a substantial victory for UK DeFi users wishing to utilize stablecoins against their crypto-held assets.

The Future of DeFi Taxation

Although the proposal has garnered positive feedback, it is still under evaluation. HMRC intends to continue discussions with stakeholders to explore the potential for legislative alterations regarding the taxation of crypto asset lending and liquidity arrangements.

The agency aims to ensure such regulations would encompass the entire spectrum of applicable transactions and remain feasible for users.