UK Crypto Tax Overhaul Leaves Key DeFi Tests Undefined

Under draft rules published by the UK tax authority, HMRC, on 13 Jul, these activities will be treated as "no gain, no loss", with tax due only when the assets are actually sold. 

HMRC expects the change, which takes effect on 6 Apr 2027, to effect around 700,000 people.

The proposals broadly deliver what the industry asked for during the consultation process that began in 2022, trade association CryptoUK told Sandmark in a written Q&A. While some members of the association preferred a broader approach, "the current proposals are a step in the right direction in our view." 

However, the qualification tests for tax treatment still leave a lot open to interpretation.

Tests too subjective

The policy paper text, while brief, outlines three scenarios in which new tax treatments will apply. 

Lending a single cryptoasset will be treated as a no gain, no loss on the way in and out, provided the same type of asset is returned. Borrowed cryptoassets will be treated as acquired at market value, with any collateral disregarded for CGT purposes. Deposits into automated market-making arrangements, the smart contracts behind liquidity pools, also qualify for no gain, no loss treatment, with a gain or loss arising only if the holder withdraws more or less than they put in.

The accompanying draft legislation outlined in more detail which protocols and pools would qualify for the treatment. Under the legislation, a lending arrangement qualifies only if it is "reasonable to conclude that there is no significant risk" that the lender cannot recover their tokens, while liquidity pools must be open to a "substantial number of persons acting independently". Neither threshold is defined, leaving taxpayers to judge for themselves whether a given pool or protocol qualifies.

CryptoUK found the qualification tests "currently too subjective in areas such as 'low risk of loss' and 'widely available'." 

When asked whether major protocols would fall inside the rules, the association said that "Aave lending and conventional Uniswap pools appear capable of qualifying, but the answer will depend on the particular reserve, pool and position rather than the protocol's name." They noted that Uniswap's concentrated-liquidity positions "may also fit less neatly" with the proposed drafting.

Before the technical consultation closes, the association will push for more objective tests and language that accommodates emerging protocol structures, so taxpayers can determine whether an arrangement qualifies "without making difficult subjective judgements." It also warned that taxpayers still lack "consistent, high-quality information" from exchanges to comply.

Doxxing concern 

CryptoUK also flagged concerns about the accompanying information powers, warning that combining personal identifiers with wallet data "creates an asymmetric risk because self-custodied assets can be transferred rapidly and irreversibly under duress." 

The team pointed to a rise in reported "wrench attacks" against crypto holders, where bad actors violently coerce crypto holders in person to hand over funds. Security firm Certik said the practice had jumped 41% in the last year in a dedicated report published in May. 

The group is calling for proportionate limits on data collection and safeguards for the handling of the information.

Industry-driven change

Despite their concerns with the clarity of its wording, CryptoUK said the measure could open crypto lending to more established players. "It removes an important tax distortion," the spokesperson said. "That makes the activity easier for taxpayers, advisers and established firms to assess, although wider adoption will still depend on the Financial Conduct Authority's (FCA) treatment of custody, consumer protection, prudential risk and decentralized structures."

Other industry participants are also positive about the change. Aave founder Stani Kulechov backed the measure in a 13 Jul post on X, supporting the no gain, no loss approach. He argued that any other treatment would have left taxpayers with a "significant admin burden". 

Aside from the legislation itself, he wrote that he was positive because it "proves that the industry can affect the eventual outcome." 

The policy paper is due to take effect from April 2027, but states that the measure will be kept under review, giving industry groups time to push for the added clarity suggested.