Uniswap’s subsidiary responds to UK tax authorities: How to approach taxation of DeFi

Compiled by: TaxDAO

DEF replied to the UK HM Revenue and Customs (“HMRC”) on tax advice for DeFi on June 22, stating that:

(1) it is consistent with the basic economic substance of typical DeFi transactions;

(2) it demonstrates maximum clarity and simplicity by minimizing the administrative burden on taxpayers to promote tax compliance;

(3) its applications should be flexible and comprehensive to adapt to future innovations;

(4) use standard market terms to describe arrangements related to tax obligations.

Summary of key issues:

Question 1: Does the lender’s right to receive borrowed or pledged tokens have legal status? Please answer this question with reference to any specific DeFi models you are involved in and highlight any legal uncertainty.

It is inaccurate to describe the lender’s right to receive borrowed or pledged tokens as having legal status. There are two key reasons for this:

a. In DeFi transactions, users’ “counterparties” are usually smart contracts, so it is difficult to determine the legal relationship and identify the parties that can defend the lender’s rights. Therefore, building a traditional legal framework for these relationships becomes complicated and not as simple because there is no “corresponding party” with legal personality;

b. The basic concept of DeFi is to create a financial infrastructure that establishes trust through software protocols rather than traditional legal relationships and mechanisms. Legal relationships are only necessary when the operation of these relationships requires trust in human discretion–in traditional finance, consumers must trust intermediaries to conduct transactions, and in the case of loans, they must trust borrowers to repay. On the other hand, DeFi is built on autonomous code (smart contracts) that can run without intermediaries. Implied trust is established through legitimate means in DeFi, which runs counter to its fundamental innovation.

Although we understand HMRC’s interest in determining whether transactions in the DeFi field should have legally binding conditions or requirements, we believe this should not be their main focus or requirement. Although some people oppose taxing transactions in DeFi without legal asset transfers or legitimate rights/obligations, we expect that the desire to tax economic activities in DeFi should take precedence over technical issues of legal features. The essence of DeFi, whether now or in future developments, revolves around eliminating reliance on legal structures to establish trust between parties. If HMRC only seeks to provide tax treatment certainty when establishing clear, enforceable legal rights, this will leave a large part of the market in uncertainty, and HMRC may hinder its ability to tax income that was originally viewed as revenue-generating activities.

In most cases, the rights generated by DeFi lending and staking arrangements may be inconsistent with traditional legal frameworks, and the rights involved (if any) are more subtle and not easily classified within established legal concepts. Therefore, HMRC should take a comprehensive approach and recognize the unique characteristics of DeFi transactions. This will ensure a fair and accurate assessment of the tax implications and wealth creation generated by DeFi transactions.

Question 2: Do you agree with changing the rules to always treat DeFi returns as income? What are the advantages and disadvantages?

Overall, we are in favor of changing the rules to default to treating DeFi returns as income.


Previously, the HMRC guidance placed a burden on taxpayers to determine whether DeFi returns should be treated as capital or income. By defaulting to treating DeFi returns as income, it will provide clarity to individual taxpayers about the tax classification of their DeFi returns.

Corporate taxpayers are generally neutral on whether DeFi returns are treated as income or capital.


Treating DeFi returns as miscellaneous income could prevent individual taxpayers from using allowances available for dividend and interest income to offset their tax obligations on their DeFi returns. However, given the decentralization of DeFi “lending” and “staking,” and the complexity associated with determining the source and determining the withholding tax obligation, we acknowledge the challenge of describing DeFi returns as interest, dividends, or royalties.

Under the proposed DeFi tax regime, non-trading individual taxpayers who might otherwise receive DeFi capital returns would not benefit from the currently lower CGT rates.

Possible solutions:

The legislation could provide 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 until contract termination or other realization of the returns for all taxpayers. These requirements could be consistent with the principles outlined in HMRC guidance in CRYPTO61214.

HMRC should consider introducing a separate allowance system similar to the personal allowance system for interest income. This approach would reduce administrative burdens on users involved in small-batch transactions, balance tax incentives (through allowances) between DeFi returns, interest, and dividends, and signal the UK government’s commitment to maintaining its position as a leading financial center globally.

Question 3: Do you anticipate any difficulties for users engaging in these and similar transactions in determining the value of DeFi returns? If so, please give an example of how this might be a problem.

As a starting point, we would encourage users to refer to the guidance published by HMRC on assessing crypto assets for UK tax purposes, CRYPTO23000. As a reference, we reproduce the following extracts:

Many crypto assets (such as bitcoin) are traded on exchanges which do not use £ sterling, so the value of any gain or loss must be converted into £ sterling on the self-assessment tax return.

Where a trade does not have a £ sterling value (for example, when bitcoin is exchanged for ethereum) an appropriate exchange rate must be established in order to convert the trade to £ sterling.

Reasonable care should be taken to arrive at an appropriate valuation for the transaction. Details of valuation methods should be retained.

Taxpayers need to determine the total received and total deposited assets and to determine what proportion of the returned assets is attributable to the re-weighting of ‘staking’ (LPed) assets and which tokens can be attributed to the fees earned (DeFi returns).

Taxpayers need to determine the legal value of assets at deposit and withdrawal. This will present difficulties and HMRC will need to clarify which sources of legal pricing data taxpayers should use in calculating their tax obligations.

For ease of management, we suggest that HMRC considers establishing an official exchange rate list that users can refer to when assessing their crypto assets.

Question 4: What impact do you expect the proposals in this document, if implemented, to have on the administrative burden and costs for DeFi users?

Overall, these proposals are a positive step towards reducing the management burden and costs for DeFi users, and will promote compliance. The removal of CGT from certain steps in the typical DeFi trading lifecycle (such as the initial lending and staking of crypto assets; and the withdrawal or return of borrowed or staked tokens at maturity) reflects the fundamental economic ownership of liquidity providers.

Assuming that DeFi trading falls within the scope of the new DeFi tax regime, the ‘lender’ will be concerned with three ‘tax events’:

a. DeFi returns received during the ‘lending’ or ‘staking’ period;

b. Potential taxable events which may arise due to lost ‘staking’ or ‘borrowed’ tokens when the ‘borrower’ defaults;

c. If “credit” sells its “right” to “borrow” or “pledge” tokens to another person.

Each of the above events occurs regularly. If there is no accurate and automated way to review transactions to show the gains/losses or income obtained according to the proposed DeFi tax rules, the new rules will still be a significant management burden for users.

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