The UK government agency responsible for the collection of taxes – Her Majesty’s Revenue and Customs (HMRC) – has updated its guidance on the treatment of crypto and digital assets, specifically for decentralised finance (DeFi) lending and staking in the UK which will significantly alter the way that these assets are classified and treated.
The proposed guidance stipulates that when a token is lent or staked into a platform or protocol, it may be classed as a disposal by HMRC for tax purposes at the moment the token leaves the users wallet.
This means that the transaction will be subject to Capital Gains Tax reporting at that moment, even though control still lies with the user, and they expect that the asset is still theirs and will be returned at a point in the future. HMRC however appears to view this differently.
The news has not been welcomed by those in the emerging cryptocurrency sector. Ian Taylor, Executive Director of CryptoUK, explains to Digital Journal why the proposed system is flawed.
Taylor’s position is: “HMRC treats crypto assets as property for tax purposes. However, this is inconsistent with the approach currently being adopted by Government and other regulatory bodies in the UK, including the Treasury and the FCA, who regard crypto assets as financial instruments and regulate them as in line with other financial services and products.”
Taylor sees this move as dangerous, noting: “This inconsistent approach by HMRC creates friction for crypto investors, adds undue reporting requirements for the consumer, and creates tax compliance confusion. Stock lending is not taxed in the same way, for example.”
Taylor’s view is also that the changes will stifle business growth, finding: “This treatment of crypto lending and staking creates an unnecessary burden for any crypto investor who will now be required to include details of any lent assets (in certain cases inaccurately determined to be ‘disposed’) on their tax returns and will have to carry out additional reporting which could require individuals to report hundreds or even thousands of transactions.”
Taylor also finds an inconsistency with government policy: “This is out of step with the Government’s stated aim for the UK to be open and attractive as a destination for investment and innovation post Brexit.”
Taylor has been developing his own solution, in recommending: “We need a clear and holistic regulatory framework for crypto assets in the UK and a consistent whole of Government approach, with joined up thinking across all agencies and departments when it comes to developing the UK approach to crypto asset regulation and taxation.”
Taylor adds that his organization will be attempting to take such recommendations forwards: “We will be seeking to engage with HMRC and others where necessary in response to the new guidance and would encourage regulators to work with the sector as it develops its approach to crypto asset regulation.”