Compilation | TaxDAO
Reference reading: How is DeFi staking and borrowing taxed? The UK government explains
DEF, a subsidiary of Uniswap, responded to the UK HM Revenue and Customs (HMRC) regarding DeFi tax consultation on June 22, stating four principles:
(i) align with the underlying economic substance of a typical DeFi transaction;
- ERC-6551 Analogical Interpretation: What is the relationship between it and account abstraction?
- Comprehensive interpretation of DID identity system: status, concepts, and importance
- Full Text of South Korea’s First Independent “Encryption Law”: Insider Trading Can Result in Life Imprisonment
(ii) exhibit utmost clarity and simplicity to promote tax compliance by minimizing administrative burden on taxpayers;
(iii) be flexible and comprehensive in its application to account for future innovation;
(iv) describe arrangements and associated tax obligations using standard market terminology.
Summary of main issues:
Question: Are the rights of the lender to receive the lent or staked tokens of a legal nature? Please respond to this question with reference to any specific DeFi models you have an involvement in, highlighting any legal uncertainties.
1. In relation to the proper characterization of a “lender’s” rights, it is essential to note that describing the “lender’s” rights to receive the “lent” or “staked” tokens as being of a legal nature is not accurate. There are two key reasons for this:
a. In a DeFi transaction, a user’s “counterparty” is typically a smart contract, making it challenging to determine the legal relationship and identify parties who could defend against the “lender’s” rights. Therefore, establishing a traditional legal framework for these relationships becomes complex and less straightforward as there is no “counterparty” with legal personality;
b. DeFi’s foundational concept aims to create a financial infrastructure in which trust is established through software protocols rather than traditional legal relationships and mechanisms. A legal relationship is only required when trust in human discretion is required for the relationship to function—in traditional finance, consumers must trust intermediaries to issue transactions and, in the case of loans, borrowers to repay. On the other hand, DeFi is built on autonomous code (smart contracts) that functions without intermediation. Suggesting that such trust is established through legal means in DeFi would run counter to its fundamental innovation.
The basic concept of DeFi is to create a financial infrastructure in which trust is established through software protocols rather than traditional legal relationships and mechanisms. Legal relationships are only required when trust in human discretion is needed for the operation of the relationship. In traditional finance, consumers must trust intermediaries to issue transactions and, in the case of loans, borrowers to repay. On the other hand, DeFi is built on autonomous code (smart contracts) that functions without intermediaries. Suggesting that such trust is established through legal means in DeFi would run counter to its fundamental innovation.
2. While we understand HMRC’s interest in determining whether transactions in the DeFi space should have a condition or requirement of being legally binding, we believe that should not be their primary focus or demand. Although there is an argument against taxing transactions where no legal transfer of assets or creation/disposal of legal rights/obligations occurs, we expect that the desire to tax economic activity in DeFi should take precedence over technical concerns about legal characterisation. The nature of DeFi, both presently and as it evolves in the future, is centred around removing dependence on legal constructs to establish trust between parties. If HMRC only seeks to provide certainty in tax treatment when clearly enforceable legal rights are established, it would leave a significant portion of the market in a state of uncertainty and HMRC may risk hindering their ability for revenue collection from what would otherwise be recognised as revenue-generating activity.
Although we understand HMRC’s interest in determining whether transactions in the DeFi space should have a condition or requirement of being legally binding, we believe this should not be their primary focus or demand. Although there is an argument against taxing transactions where no legal transfer of assets or creation/disposal of legal rights/obligations occurs, we believe that the desire to tax economic activity in DeFi should take precedence over technical concerns about legal characterisation. The nature of DeFi, both presently and as it evolves in the future, is centred around removing dependence on legal constructs to establish trust between parties. If HMRC only seeks to provide certainty in tax treatment when clearly enforceable legal rights are established, it would leave a significant portion of the market in a state of uncertainty and HMRC may risk hindering their ability for revenue collection from what would otherwise be recognised as revenue-generating activity.
3. In the majority of cases, the nature of rights arising from DeFi lending and staking arrangements may not align with traditional legal frameworks, and the rights involved, if any, are more nuanced and not easily categorised within established legal concepts. Therefore, HMRC should adopt a comprehensive approach that recognises the unique characteristics of DeFi transactions. This would ensure a fair and accurate assessment of the tax implications and treatment of wealth creation derived from DeFi transactions.
In most cases, the nature of rights arising from DeFi lending and staking arrangements may not align with traditional legal frameworks, and the rights involved, if any, are more nuanced and not easily categorized within established legal concepts. Therefore, HMRC should adopt a comprehensive approach that recognizes the unique characteristics of DeFi transactions. This would ensure a fair and accurate assessment of the tax implications and treatment of wealth creation derived from DeFi transactions.
Question: Do you favor a change in the rules to always treat the DeFi return as being of a revenue nature? What are the pros and cons?
Question: Do you favor a change in the rules to always treat the DeFi return as being of a revenue nature? What are the pros and cons?
1. Overall, we favor a change in the rules to treat the DeFi returns as being of a revenue nature by default.
Overall, we favor a change in the rules to treat the DeFi returns as being of a revenue nature by default.
Pros
Pros
2. Previous HMRC guidance placed the burden on taxpayers to determine whether DeFi returns should be treated as capital or revenue. By defaulting to treating DeFi returns as revenue, it would provide individual taxpayers with clarity regarding the tax classification of their DeFi returns.
Previous HMRC guidance placed the burden on taxpayers to determine whether DeFi returns should be treated as capital or revenue. By defaulting to treating DeFi returns as revenue, it would provide individual taxpayers with clarity regarding the tax classification of their DeFi returns.
3. A corporate taxpayer will generally be neutral on the revenue vs capital treatment of DeFi returns.
A corporate taxpayer will generally be neutral on the revenue vs capital treatment of DeFi returns.
Cons
Cons
4. Treating DeFi returns as miscellaneous income may prevent individual taxpayers from offsetting their tax liabilities on DeFi returns using allowances available for dividends and interest income. However, we acknowledge the challenges of characterising DeFi returns as interest, dividends, or royalties due to the complexities related to ascertaining source and determining withholding tax obligations given the decentralised nature of DeFi “lending” and “staking”.
Treating DeFi returns as miscellaneous income may prevent individual taxpayers from offsetting their tax liabilities on DeFi returns using allowances available for dividends and interest income. However, we acknowledge the challenges of characterizing DeFi returns as interest, dividends, or royalties due to the complexities related to ascertaining source and determining withholding tax obligations given the decentralized nature of DeFi “lending” and “staking”.
5. Under the proposed DeFi tax regime, non-trading individual taxpayers who might otherwise receive a capital DeFi return will not benefit from the currently lower CGT rate.
According to the proposed DeFi tax system, non-trading individual taxpayers who might otherwise receive a capital DeFi return will not benefit from the currently lower CGT rate.
Possible solutions
Possible solutions
6. The legislation could specify that DeFi returns are treated as miscellaneous income by default. However, if certain requirements are met, such returns could be treated as capital for individuals and deferred for all taxpayers until the end of the contract or a return otherwise arises. These requirements could align with the principles outlined in HMRC guidance in CRYPTO61214.
The legislation could specify that DeFi returns are treated as miscellaneous income by default. However, if certain requirements are met, such returns could be treated as capital for individuals and deferred for all taxpayers until the end of the contract or a return otherwise arises. These requirements could align with the principles outlined in HMRC guidance in CRYPTO61214.
7. HMRC should consider introducing a separate allowance similar to the personal allowance regime for interest income. This approach would alleviate the administrative burden for users engaging in low-volume transactions, equalise tax incentives (via allowances) between DeFi returns, interest, and dividends, and demonstrate the UK government’s commitment to maintaining its global position as a leading financial centre.
HMRC should consider introducing a separate allowance similar to the personal allowance regime for interest income. This approach would alleviate the administrative burden for users engaging in low-volume transactions, equalise tax incentives (via allowances) between DeFi returns, interest, and dividends, and demonstrate the UK government’s commitment to maintaining its global position as a leading financial centre.
Question: Do you foresee any difficulties for users who engage in these and similar transactions to establish the value of the DeFi return? If so, please provide examples where this may be an issue.
Question: Do you foresee any difficulties for users who engage in these and similar transactions to establish the value of the DeFi return? If so, please provide examples where this may be an issue.
8. As a starting point, we expect that users will refer to HMRC published guidelines on valuing cryptoassets for UK tax purposes in CRYPTO23000. For reference, we set out the extract below:
As a starting point, we expect that users will refer to HMRC published guidelines on valuing cryptoassets for UK tax purposes in CRYPTO23000. For reference, we set out the extract below:
Many cryptoassets (such as bitcoin) are traded on exchanges which do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on the Self-Assessment tax return.
Many cryptoassets (such as bitcoin) are traded on exchanges which do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on the Self-Assessment tax return.
If the transaction does not have a pound sterling value (for example, if bitcoin is exchanged for Ether) an appropriate exchange rate must be established in order to convert the transaction to pound sterling.
Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. Details of the valuation methodology should be kept.
The taxpayer would then need to determine total assets received vs. deposited and determine which portion of assets returned is attributable to the reweighting of “staked” (LPed) assets and which of the tokens are attributable to the fees (the DeFi returns) earned.
9. The taxpayer would need to determine the fiat value of the assets at the time of deposit and the time of withdrawal. This will present difficulties and HMRC will need to clarify which sources of fiat-pricing data will be acceptable for taxpayers to use as they calculate their tax obligations.
10. For administrative ease and clarity, we recommend HMRC consider establishing a list of official exchange rates that users may refer to when valuing their cryptoassets.
Question : What impact do you expect the proposals in this document, if implemented, to have on administrative burdens and costs for users of DeFi?
11. Overall, the proposals are a positive step towards alleviating administrative burdens and costs for users of DeFi and will promote compliance. Removing the CGT consequences on certain steps on the lifecycle of a typical DeFi transaction (e.g., the initial lending and staking of cryptoassets; and the withdrawal or return of the lent or staked tokens at the end of the term) reflects the underlying economic ownership of a liquidity provider.
12. 假设 DeFi 交易属于新的 DeFi 税收规则的范围，那么“贷款人”将关注 3 个“税务事件”：
a. DeFi returns that are received during the term of the “lending“ or “staking“;
在“借贷”或“质押”期限内收到的 DeFi 回报;
b. When a “borrower“ becomes insolvent as this could give rise to a taxable event as a result of lost “staked“ or “lent” tokens; and
当“借款人”破产时，由于丢失“质押”或“借出”代币，这可能会引起应税事件;和
c. If the “lender“ sells their “rights“ to the “lent” or “staked” tokens to another person.
如果“贷方”将其对“借出”或“质押”代币的“权利”出售给另一个人。
13. 上述每个事件都会定期发生。如果没有准确和自动化的方法可以审查交易以显示根据拟议的 DeFi 税收规则获得的收益/损失或收入，新规则仍然是用户的重大管理负担。
Reference:
https://www.defieducationfund.org/_files/ugd/84ba66_e73f5656c9a047788521cf09259db7a4.pdf
欢迎阅读吴说报道精选：火币独家报道、币安独家报道、比特大陆系列、监管与冻卡系列、Filecoin系列、币圈乱象揭弊、矿场监管动态等
（由于公众号推送逻辑调整，老读者请给吴说公众号加上星标，以避免无法收到，加星标方式：如何给公众号设置星标）
According to the notice issued by the central bank and other departments on “Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions”, the content of this article is only for information sharing and does not promote or endorse any business or investment activities. Readers are strictly required to comply with local laws and regulations and not participate in any illegal financial activities. No trading entrance, guidance, issuance channel guidance, etc. will be provided for any virtual currency, digital collection related issuance, transaction and financing, etc. Unauthorized reproduction or copying of the content is prohibited, and violators will be held legally responsible.
Like what you're reading? Subscribe to our top stories.
We will continue to update Gambling Chain; if you have any questions or suggestions, please contact us!
