According to a recent press release, the United Kingdom is preparing to implement a tax regime on lending and borrowing on decentralized finance (DeFi) protocols. Reportedly, the region has been hustling for it for over a year.
The UK’s taxation division which is also known as HM Revenue and Customs released a consultation document seeking views on modifying the tax treatment of DeFi lending and staking businesses.
Reportedly, the final call on whether to proceed with legislative changes or not will be depending upon the consultation and will be released after it. Sources reveal that this is the second stage of a five-step process and will be followed by others which include drafting legislation, implementing and monitoring, and finally, reviewing and evaluating the change.
As stated in the press release, the British authorities have launched the consultation aiming to create a regime that aligns the taxation of crypto assets used in DeFi lending and staking transactions with the underlying economic substance while bringing down the administrative burden on users.
Additionally, sources reveal that the government aims to establish clear tax and regulatory treatment of the field to position the country “at the forefront of safe, sustainable, and rapid innovation in crypto assets and blockchain technologies.”
To validate the process and make it more inclusive, the tax authority has called on investors, professionals, and firms from diverse backgrounds. Reportedly, these include entities in DeFi activities, including technology and financial service firms; trade associations and representative bodies; academic institutions and think tanks; and legal, accountancy, and tax advisory firms to submit their views on the matter by 22 June 2023. As stated by the authorities:
The government is inviting answers to the questions below on a potential legislative solution that aims at better aligning the taxation of crypto assets used in DeFi transactions with the underlying economic substance. In addition to the specific questions posed, a more general comment on the issues discussed is welcome.
The country’s plan to frame its taxation policies for the DeFi sector traces itself to July last year when the government called for suggestions from companies, professionals, and investors for framing tax policies for decentralized finance (DeFi) activities.
Furthermore, the proposed legislative modifications explicitly state that the crypto used in DeFi transactions would no longer be treated as a disposal for tax. Instead, Capital Gains Tax (CGT) would apply in addition to tax disposal when the crypto assets are economically disposed of in a non-DeFi transaction.
According to a separate document published by HM Revenue and Customs in March, crypto holders will have to declare their profits on the capital gains form and will be subject to taxation when investments are sold for a profit. However, as per the current terms holding cryptocurrencies only will not incur a tax.
Notably, the UK is not just intending to bring cryptocurrencies under its tax regime, it is also looking forward to regulating the industry. The country’s Parliament has been discussing legislation around cryptocurrencies. Economic Secretary to the UK Treasury, Andrew Griffith, revealed last week that the authorities are planning to impose a regulatory framework on the crypto industry in the next 12 months.
He also asserted that the upcoming regulation will facilitate the development of the asset class and is aimed at turning the Kingdom into a global cryptocurrency hub, a vision that the British prime minister and lawmakers have been cherishing for a while.
Prior to this, in January, he promised the industry to bring forth a timely, sensible, and balanced crypto regulation. Owing to all of these measures a lot of digital assets firms are eyeing the region for expansion including several big-shot crypto companies.