UK Proposes No Gain, No Loss Tax Rule for DeFi Transactions

TLDR

• UK’s HMRC proposed a “no gain, no loss” tax approach for DeFi transactions, deferring capital gains tax until tokens are sold
• The framework covers crypto lending, borrowing arrangements, and liquidity pool deposits
• Under current rules, depositing crypto into protocols can trigger capital gains tax of 18% to 32%
• Major industry players including Aave, Binance, and a16z submitted responses supporting the proposal
• The proposal is not final and HMRC continues to consult with stakeholders before making legislative changes

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The UK government has proposed a new tax framework for decentralized finance users that would defer capital gains taxes on certain crypto transactions. HM Revenue and Customs published the proposal on Wednesday, outlining a “no gain, no loss” approach to DeFi activities.

Under the current tax system, UK users face capital gains tax when depositing funds into a protocol. This applies regardless of whether the deposit is for lending, borrowing, or providing liquidity. Capital gains tax rates in the UK range from 18% to 32% depending on the transaction type.

The new proposal would change this system. Users who deposit crypto into lending protocols or contribute tokens to automated market makers would not be taxed at the point of deposit. Instead, tax would only apply when tokens are eventually sold or redeemed.

The framework covers lending out a token and receiving the same type back. It also applies to borrowing arrangements and moving tokens into liquidity pools. Taxable gains or losses would be calculated when liquidity tokens are redeemed, based on the difference between tokens received and tokens originally contributed.

Aave CEO Stani Kulechov called the proposal “a major win for UK DeFi users who want to borrow stablecoins against their crypto collateral.” Maria Riivari, a lawyer at Aave, said the change would bring clarity that DeFi transactions do not trigger tax until tokens are actually sold.

Industry Response and Consultation

HMRC received 32 formal written responses during the initial consultation period. Submissions came from individuals, businesses, tax professionals, and representative bodies. Major industry participants included crypto exchange Binance, venture capital firm a16z Capital Management, and self-regulatory trade association Crypto UK.

Most respondents supported the shift to a no gain, no loss approach. They cited administrative burdens and uncertainty under the existing tax regime as key concerns. Some responses warned that alternative models could increase complexity for retail users.

The proposal aims to align tax rules with how DeFi protocols actually function. This would reduce administrative burden and prevent tax outcomes that do not reflect economic reality. For complex multi-token arrangements, gains would be taxed if users receive more tokens back than deposited, while receiving fewer tokens would be treated as a loss.

Remaining Considerations

The government’s proposed definition of qualifying cryptoassets would exclude tokenized real-world assets and traditional securities. This keeps the scope focused on typical DeFi tokens rather than regulated financial instruments. The framework does not eliminate all taxable events in the DeFi process.

Purchasing ether, converting it to wrapped ether, and liquidating gains from DeFi activity will still be taxed. Users might still need to report high volumes of transactions even under the new system. HMRC is working with software providers to assess reporting burden.

The proposal is not yet final. HMRC stated it will continue engaging with relevant stakeholders to assess the merits of the approach. The agency wants to ensure the framework covers the range of transactions that take place under these arrangements and remains viable for individuals to comply with.

HMRC has not announced a timeline for when the proposed changes might become law.

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