The Government has launched a consultation to modify the tax treatment of cryptoassets used in decentralised finance (DeFi) lending and staking transactions.

The law currently treats many of these transactions as disposals for tax purposes. This usually triggers a capital gains tax (CGT) charge, despite the owner still having an economic interest in the asset.

According to industry representatives and tax professionals, these rules cause difficulty and do not reflect the “underlying economic substance” of DeFi transactions.

Instead, the Government plans to introduce separate rules for DeFi lending and staking. Under the proposed changes, CGT will only apply once the asset is fully disposed of.

The Government hopes this measure will reduce costs and simplify the administrative burden for taxpayers involved in DeFi transactions. The approach also allows policymakers to make further legislative changes as the DeFi market evolves.

Gary Ashford, deputy president of the Chartered Institute of Taxation, said it was “encouraging” to read these proposals.

“Whatever the rules on taxing cryptoassets, the Government needs to work hard to raise awareness among owners of crypto of their obligations on both tax payment and reporting.”

The consultation will run from 27 April 2023 to 22 June 2023.

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