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UK tax advisors have expressed their approval of the proposed regulations for DeFi lending and staking activities, describing it as a significant and welcome advancement that provides a level of "certainty" to the crypto industry, thereby bolstering its credibility and potential for growth.
The UK government's tax agency, His Majesty's Revenue and Customs (HMRC), has announced a consultation period of eight weeks for crypto industry stakeholders to provide input on its proposal, beginning on Thursday.
The novel framework suggests that the imposition of capital gains tax on DeFi lending or staking should only be applicable to specific activities, rather than all transactions.
"This is a positive step for the crypto asset industry in the U.K. Whilst regulators may appear in the U.S. to be creating confusion, these moves aim to provide certainty for the U.K. industry,” Dion Seymour, crypto and digital asset technical director of U.K. tax service provider Andersen said in an emailed statement to CoinDesk.
“We applaud HMRC for being the first tax administration to provide specific rules for DeFi,” Seymour added.
David Lesperance, Managing Director and Tax Advisor at Lesperance Associates, praised the HMRC's proposal as "excellent result," in a statement. Meanwhile, Lisa Cameron, the chair of a cross-party crypto group in Parliament, expressed hope that this marks the first step towards establishing a comprehensive tax framework.
Simplifying crypto taxes
The government, in its consultation, acknowledged the industry's plea for dedicated regulations for DeFi markets, comparable to those governing repo and stock lending.
In an interview with CoinDesk in July, Ian Taylor, a board advisor at the industry advocacy group CryptoUK, highlighted that the crypto industry and its proponents were pushing for fresh tax regulations specific to DeFi lending, as the existing policies were deemed outdated and gave rise to an excessive number of taxable events.
Although Lesperance views this development as a step towards streamlining operations for the industry, Seymour holds a different opinion.
“An opportunity to simplify the rules may have been lost," Seymour said.
He pointed to another – in his view simpler – option in the HMRC’s original call for evidence, which proposed treating the transfer of crypto for lending and staking as “no gain no loss” transactions, “deferring the tax liability until the assets are economically disposed of.”
Seymour argues that following the regulator's suggested approach, which draws on repo and stock lending rules and limits capital gains tax liability to only certain lending and staking activities, would complicate the monitoring of taxable events. As a result, she does not believe that this method will provide the necessary clarity and simplicity required by the industry.
The HMRC noted in its consultation that the "no gain, no loss" option would increase the administrative workload while offering less adaptability to incorporate future legislative changes aligned with the latest developments in the DeFi realm.
Seymour also highlighted the potential risk of individuals assuming that DeFi activities are entirely tax-free.
“The general public who already have a very scant knowledge about how tax works and are even less inclined to actually read HMRC guidance, so the education side is still going to be quite critical,” he said.