Crypto firms and MPs join forces to lobby against DeFi tax

The change would particularly hit users using DeFi to grow their cryptoassets via lending and staking. In a stake, a user leases their crypto assets to a particular blockchain, earning a fee for doing so, while lending involves directly loaning a crypto asset to a borrower.

HMRC’s view of crypto effectively strips it of the more favourable treatment that comes with a ‘financial instrument’ classification, which was how the Financial Conduct Authority had viewed the asset class up to now.

“We have collated feedback from industry specialists in taxation and some of our member organisations to help address some of the key issues raised in this guidance,” CryptoUK said in its note.

The updated guidance has triggered a warning from tax experts over the likely hit to the UK’s cryptocurrency sector. DLA Piper partner Jason Collins told Financial News earlier this week that financial technology firms may need to scale down activity if users step back from crypto investments over fears of a tax hit.

The hit for traders and investors using DeFi platforms to manage digital assets is also expected to be applied retrospectively.

“We expect that some investors might disagree with the interpretation but they are likely to have to go to court to succeed,” Collins said.

READ How UK’s shock DeFi tax rules could torpedo London’s crypto and fintech boom: ‘It could just drive trading to Portugal’

The use of DeFi has grown exponentially over the past two years. The top 100 DeFi tokens had combined market capitalisation of nearly $100bn as of December 2021, according to Moody’s Analytics.

Larger investors are also outweighing smaller ones on adoption; institutional transactions above $10m accounted for over 60% of DeFi transactions in the second half of 2021, compared to less than 50% for all cryptocurrency transactions, according to Chainalysis data.

“It is crucially important that we have a consistent approach in the UK when it comes to cryptoassets, including both the regulatory and tax treatment of this emerging market,” chair of the Crypto and Digital Assets All Party Parliamentary Group Lisa Cameron said.

CryptoUK, which represents fintechs involved in cryptocurrency wallets, trading, and management of digital assets, as well as asset managers that facilitate trading and investing, was among the first in the industry to oppose the new tax guidance publicly.

On 2 February, when the new guidance was issued, executive director of CryptoUK Ian Taylor warned of “undue reporting requirements for the consumer” and “tax compliance confusion”.

Crypto investors would have to report “hundreds or even thousands of transactions,” according to Taylor.

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Taylor also said the move was “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.”

In an emailed statement to FN, Cameron said that in order to make the UK attractive for innovation and investment, particularly in financial services, the country needs to have “a clear regulatory framework aligned with tax treatments for cryptoassets” that provides clarity for both businesses and consumers.

“We have some excellent examples of innovative crypto businesses here in the UK, not just in London, but across the country, employing hundreds of people in highly skilled roles, and we don’t want to run the risk of losing these businesses to other overseas markets,” Cameron said.

HMRC and the Treasury were contacted for comment.

To contact the author of this story with feedback or news, email Penny Sukhraj