The Tax Faculty supports implementing a regime for taxation of decentralised finance (DeFi) involving the lending and staking of cryptoassets. However, it is vital that any regime is simple for individual investors to understand and abide by.
Following HMRC’s previous call for evidence on the taxation of DeFi lending and staking, its further consultation proposes using a modified version of the repo rules. This regime is likely to be more familiar to corporate tax practitioners.
ICAEW’s Tax Faculty responds in ICAEW REP 60/23, preferring a regime based on the more widely known no gain / no loss (NGNL) rules. Given that many investors in cryptoassets are individuals, unless the rules are simple and straightforward, there is likely to be widespread non-compliance. Using a regime that individuals and their advisers are already familiar with would allow greater comprehension and therefore compliance with the new rules.
The nature of DeFi means that transactions are far more frequent than other types of investment. Some measures to simplify record keeping and reporting will be required to ensure that tax events are not triggered excessively. It is important that the government strikes a balance between this and neutrality, as introducing a more favourable tax outcome for DeFi may distort investor behaviours.
Any new regime will also need to be designed to allow for future flexibility. The cryptoasset industry is fast-moving. This creates the risk that legislation, if not thoughtfully drafted, will soon become obsolete as technology develops.
Whichever regime is ultimately chosen, the faculty highlights the importance of an education campaign to inform taxpayers of the new rules and their reporting obligations. It is already necessary for investors in crypto to report and pay tax on their income and gains from cryptoassets. However, there is still a lot of confusion about how and when the rules apply.
The faculty hopes that the government will consult on the taxation of cryptoassets more widely.
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