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HMRC DeFi proposed taxation framework does not reflect market reality

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Leading providers of crypoto asset accounting services have joined forces to challenge HMRC’s current proposed taxation framework for decentralised finance (DeFi) transactions – calling for a more nuanced and tailored approach to capture the unique characteristics of the rapidly evolving sector.

Experts at tax calculation software provider, Recap have collaborated with long-term partners, chartered accountants and business advisors, Wright Vigar, to deliver a ‘real-world’ response to the recent DeFi consultation conducted by HMRC.

Having analysed the examples provided in the government consultation on the taxation of DeFi outlines, Recap and Wright Vigar found that the examples did not accurately reflect the majority of market activity – overlooking complexities of transactions involving multiple assets and failing to consider the partial redemption of DeFi positions.

In a joint report, the companies have emphasised that the proposed ‘repo-like’ solutions for the taxation of DeFi fall short of addressing the intricacies and idiosyncrasies of cryptoassets and the DeFi sector as a whole.

Strongly disagreeing with the notion that all DeFi rewards should be classified as income, the two organisations have presented arguments for the rewards to be treated as capital, with a Nil acquisition cost.


Recap and Wright Vigar have instead proposed the development of an ‘Asset composition, No Gain, No Loss’’ method as “the only way to cater for the complexities” of the tax position, while also future-proofing the tax treatment of DeFi transactions.

Speaking about their concerns, co-founder and CEO of Recap, Daniel Howitt said: “The UK has its sights set on becoming one of the most prominent hubs for crypto assets, and as such it’s vital that the regulations and legislations around the sector be well-informed, all encompassing and as concrete as possible. A fair and proportional tax policy on DeFi lending and staking is critical not only for the aforementioned individuals and businesses, but also for the broader ambitions of the UK establishing itself as a major crypto hub.”

Louise Lane, Associate Tax Director at Wright Vigar, heads up its crypto team. Louise added: “Navigating the intricate universe of cryptoassets demands expertise and innovation. Many of the scenarios used in the HMRC report are contrived, and lack real-world insight.”

Lane said that if rewards are treated as capital, it will provide simplification and reduce the complexity of having to identify rewards received in a bundle with reclaimed tokens. Furthermore, No Gain, No Loss treatment for the tokens locked up creates a fair outcome and avoids a dry tax charge when the same type and quantity of assets are returned.

As part of the comprehensive report, Recap and Wright Vigar have formally requested clarity from HMRC regarding a taxpayer’s DeFi tax position for the tax years leading up to the introduction of the new legislation. The organisations stress the importance of establishing clear guidelines to ensure fair and consistent treatment of DeFi transactions and to provide certainty for individuals and businesses operating in this emerging sector.

Recap and Wright Vigar say they are committed to facilitating productive dialogue and collaboration with HMRC and other relevant authorities to achieve a well-informed and balanced regulatory environment for DeFi and crypto assets.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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