The UK’s tax authority, Majesty’s Revenue and Customs (HMRC), released an update to its guidance on Wednesday, reported Bloomberg.
The new policy provides a series of “guiding principles” that act as general guidance in determining whether DeFi-related return or participation should be classified as income or capital gain.
How loan returns or staking is taxed depends on whether it is considered capital or income, however determining this can be a complex task. In the post, the HMRC admitted about this difficulty:
Token lending/staking via Decentralized Finance (DeFi) is a constantly evolving area, so it is not possible to establish all the circumstances in which a lender/liquidity provider makes a return on their activities and the nature of that performance. Instead, some guiding principles are established.
New policy to tax DeFi and staking
The latest guide sets out four distinct points designed to make it easier for people to determine the nature of their tax. Firstly, if the return received by the lender or liquidity provider is known “at the time the agreement is made”. If known, it would indicate a revenue receipt, but if unknown, it would indicate a capital receipt.
Second, if the return is realized through the disposal of a capital asset, it qualifies as capital. Conversely, if the borrower, or the DeFi lending platform, pays the yield to the lender/liquidity provider, the yield should be classified as income.
Third, the regulator indicated that lump-sum payments are “more likely” to qualify as principal; while recurring payments are “more likely” to be in the nature of revenue. Finally, the HMRC mentions the loan period as another variable that determines the nature of the repayment, everything will depend on whether it is “fixed or indefinite, short or long term”, he said.
The document presents some examples of how users can determine the nature of their loan return or participation. For example, if the return amount has already been agreed upon, say 5% per annum, it will most likely be a revenue receipt, the regulator said. On the other hand, if the income is “unknown and speculative”, it is probably a capital receipt.
As CoinDesk noted, the new policy is an update to previous guidance that had been published by HMRC in March 2021. According to that document, taxation of staking trades depended on whether the activity amounted to “taxable trading.” The wording closely resembled the established rules for taxing cryptocurrency mining, the outlet adds.