Why is HMRC’s new DeFi lending tax policy dubbed ‘unnecessary burden’?

Highlights 

• Britain’s tax agency, Her Majesty’s Revenue and Customs (HMRC), is bringing down the gavel on DeFi lending and staking rules which could have an impact on the development of innovation in the Decentralized Finance sector.
• According to the updated regulatory document released by the HMRC, tax complications arise from whether the return accruing to the lender is made from providing a service, i.e. revenue, or from capital gains.
• CryptoUK dubbed this latest development an ‘unnecessary burden.’

Britain’s tax agency, Her Majesty’s Revenue and Customs (HMRC) is bringing down the gavel on DeFi lending and staking rules which could have a significant impact on the development of innovation in the Decentralized Finance sector.

According to the updated regulatory document released by the HMRC, the nature of the return received by the lender will primarily depend on the nature of the transaction. It further states that lending or staking of tokens through DeFi is a “constantly evolving” process, and therefore, it is difficult to determine the way in which lenders earn their returns. The tax complications arise from whether the return accruing to the lender is made from providing a service, i.e. revenue, or from capital gains.

Also read: Can UK be the home of cryptocurrencies?

The UK government has traditionally been known to take a grim view of cryptocurrencies or crypto adoption. However, contrary to the government’s view, crypto adoption by investors has been on a rise and is generally considered to be one of the hotbeds in Europe.

DeFi protocol allows users to trade and lend crypto assets without intermediaries. It is one of its unique features that has attracted lots of investors. But lack of proper documentation related to anti-money laundering and defined clear governance structures have had regulators constantly questioning its proper way of functioning.

Also read: UK’s FCA eyes crypto ad regulation, denounces ‘refer-a-friend' offers

‘Unnecessary burden’

Many market experts are now dubbing this latest development an “unnecessary burden.” Experts such as Ian Taylor, Executive Director of CryptoUK, feel that this adds to the tax burdens of the stakers. Besides, he lamented that with this new regulation, crypto investors will unnecessarily be burdened with an inconsistent approach as compared to a stock market investor.

He elaborated that with this new ruling, the crypto investors in Britain will have to include details of any lent assets during their tax filing. He further added that the new rules would further add to tax complications as the investors may have to disclose numerous tax transactions.

Will this hold the UK back in the crypto race?

Many believe that the UK, of late, has been trailing in the crypto race. Ask former Chancellor of the Exchequer and advisor Philip Hammond and he would tell you that the UK is behind other countries in Europe in setting a clear-cut stance when it comes to cryptos.

He warned the Boris Johnson government that if Britain continues to trail in the race, one could see countries such as Switzerland, Monaco, and Germany become the hotbeds of crypto activity in the future.

Matt Hancock, former Secretary of State for Health and Social Care, too has urged the House of Commons that the UK needs to take a more progressive stance when it comes to blockchain development in the country.

Hancock hinted that tokenisation could lead to better liquidity in assets and exploring the blockchain technologies could provide the UK an edge. Besides, he suggested cryptos could provide economic stimulation and could even reduce financial crimes in the country.

Viewpoint

It seems that UK regulators have taken a tougher stance on cryptocurrencies. The government seems to be in no hurry to come to a decision on cryptos – that is whether to regulate it or ban it – but it definitely has got investors on alert for some time now.