UK Government Explores New Tax Regime
(Source: HMRCgovuk)
HM Revenue and Customs (HMRC), the UK’s tax authority, has recently published a draft policy proposing changes to how cryptoassets are taxed in DeFi transactions. The central concept is to implement a No Gain, No Loss (NGNL) framework, which would redefine whether activities like lending and liquidity provision are considered disposals for tax purposes.
Currently, depositing cryptoassets into DeFi protocols—even for lending or yield generation—can be treated as a disposal and trigger capital gains tax. The proposed approach seeks to defer taxation, so tax liability arises only when assets are actually sold or when a real economic gain or loss occurs.
Lending and AMM Deposits Would Not Trigger Immediate Tax
If adopted, the proposal would allow DeFi users to avoid immediate taxation in the following scenarios:
- Depositing cryptoassets into lending platforms
- Providing tokens as liquidity to Automated Market Makers (AMMs)
- Engaging in protocol operations involving multi-token combinations
Under the NGNL model, only actual gains or losses need to be reported. If users withdraw more tokens than they originally deposited, the difference is considered a gain; if they withdraw less, it is treated as a loss.
Purpose of the Tax Adjustment
This proposal aims to reduce the administrative burden and address unreasonable tax outcomes created by previous rules, aligning the tax system more closely with the economic reality of DeFi activities. HMRC also stated that the new approach would apply to more complex protocol structures, including those with multi-token combinations or unique features in decentralized protocols.
To date, HMRC has received 32 formal responses from organizations such as Aave, Binance, Deloitte, and CryptoUK. The majority support the NGNL approach, citing that the current tax regime results in many unnecessary disposal events and excessive administrative overhead—especially for everyday users—and that some alternative solutions could further complicate tax reporting.
Ongoing Challenges
While the NGNL adjustment would ease some burdens, the UK’s DeFi tax environment remains challenging. For example:
- Purchasing ETH
- Converting ETH to WETH
- Ultimately realizing DeFi gains
These activities would still be subject to tax.
Furthermore, the UK government plans to exclude tokenized real-world assets (RWA) and traditional securities, focusing only on standard DeFi tokens to prevent overlap with financial regulation. Even within the NGNL framework, DeFi users may still need to track a high volume of transactions. HMRC has indicated it will collaborate with software providers to explore ways to reduce the reporting burden.
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Summary
The UK government has not yet set a legislative timeline but has pledged ongoing collaboration with industry participants, tax professionals, and protocol developers to refine the rules’ implementation. If NGNL becomes law, the UK’s DeFi tax regime would become more transparent and flexible, offering significant benefits to both users and businesses.
