Decentralised Finance – HMRC’s new guidance on lending and staking

DeFi-nitely maybe, or just too complicated? HMRC’s new DeFi guidance demonstrates the growing pains industry and tax advisors face.

DeFi-nitely maybe, or just too complicated? HMRC’s new DeFi guidance demonstrates the gr

In the ever-changing, twin worlds of the tangible and the metaverse, where we see virtual banking lounge openings and tax authorities seizing cryptoassets, has HMRC’s new DeFi (decentralised finance) guidance provided more clarity, or simply demonstrated this evolving world still does not fit neatly in a box? HMRC have boldly gone where only the Norwegian authorities have gone before in providing guidance on DeFi, so whilst this may not provide all of the answers, and does not claim to, it is a marker of HMRC’s intent to play a part in the development of this industry.

So what is DeFi? DeFi is the umbrella term for a variety of financial applications, akin to traditional financial services, using cryptoassets or distributed ledger technology.

HMRC’s guidance


Given the breadth and depth of existing DeFi products, without even considering those yet to come, this will be an area of dynamic development and change. HMRC’s updated guidance (published 2 February 2022) covers one of these areas; lending and staking.

As there is no definition, either statutory or legal, of ‘lending’ or ‘staking’, the guidance sets out its application to two types of transaction:

  • A person (lender) transfers the control of tokens to another person (borrower). At the time that transfer occurs, the lender acquires a right to demand that the borrower transfers to the lender the control of an equivalent quantity of tokens at a time in the future to satisfy the loan; and
  • A person (liquidity provider) transfers the control of tokens to a DeFi lending platform (staking or providing liquidity). At the time when the transfer occurs, the DeFi lending platform transfers control of one or more different tokens to the liquidity provider.

The guidance focuses on five common types of ‘loan’ including peer to peer lending, and lending via a platform with or without a return in the form of tokens.

Tax treatment

HMRC do not consider cryptoassets to be currency or money, but (generally) chargeable capital gains assets. This article does not address when an individual or entity may be viewed as trading in cryptoassets.

Return on lending/staking

As with more traditional transactions, there is the question of whether any return is in the nature of capital and treated as a capital gain, or as revenue and falls within miscellaneous income. HMRC remain consistent and are applying those principles relied upon when considering this question more generally. For example, is this a disposal of a capital asset, or revenue earned from the provision of a service? Is there a recurring or one-off payment? Is the return fixed or known?

As a natural consequence of HMRC’s classification of cryptoassets, any quasi-income return, whilst it may be viewed colloquially as akin to interest, will not be treated so for statutory purposes. Similarly, HMRC do not view lending/staking as constituting a loan relationship.

Tax on disposal – and is there one?

If lending or staking involves the transfer of beneficial ownership, by lender or borrower, HMRC consider there to be a capital gains disposal, including the potential for deferred, ascertainable, and unascertainable consideration. Whether there is a transfer may not always be clear and will rely on a detailed examination of the facts (for example, the smart contract terms). This means two, seemingly identical products, offered by different exchanges could result in radically different tax treatments.

As cryptoassets do not generally meet the definition of a security, to the frustration of the industry, the statutory disregard available for repos of securities and stock loans is not available here.


It is fair to say that areas of the industry have been left disappointed by this guidance; in particular, that lending tokens could be treated as a disposal. This is felt to be inconsistent with the treatment adopted by other areas of Government and fails to acknowledge that these products are intended to mimic a lending relationship. As a result, it is feared this treatment could result in significant reporting and compliance burdens. Any participant in such transactions should therefore take care to understand their tax obligations.