Regulation is arguably the most impactful factor that will determine the future of investing in many crypto assets. Since our founding, Hashdex has focused on being a resource for policymakers across the globe, helping them understand how regulation will impact the development of the crypto ecosystem and the ability of investors to access this market.
As part of these efforts, today we submitted a response to the UK government’s consultation request on the taxation of decentralized finance (DeFi). The request is aimed at providing the UK government a better understanding of how it could modify the tax treatment of DeFi lending and staking, with the ultimate goal of creating a tax regime that is appropriate for these types of transactions without creating unnecessary burdens on users.
DeFi remains one of the most promising sectors of the crypto ecosystem, presenting an alternative to traditional financial services that will make access to services like lending, borrowing, and trading less centralized and more efficient for market participants. In our response to the consultation, we make a number of recommendations we believe will help ensure that the DeFi sector will continue to flourish, including:
It’s important to dissociate staking transactions and lending rewards and not use a “one-size-fits-all” generic term such as “DeFi return” to encompass these services, given their particularities.
Lending transactions are common traditional financial transactions, in which the lender will lend assets to the borrower in exchange for a fee. This fee will usually be considered income, given the nature of the transaction. Staking rewards, on the other hand, are more similar to “capital nature”. When a user stakes their tokens and receives extra tokens, of the same type and nature, for that staking process, it should be considered as an increment in its assets, not as a source of income, similar to a mutual fund that reinvests dividends into the fund’s NAV.
For taxation purposes, a reasonable middle ground to separate lending transactions from staking rewards would be to always consider lending returns as income and staking rewards as capital.
Financial products with exposure to crypto such as mutual funds, ETFs and ETNs are not included in the proposal and might pose difficulties when it comes to applying the proposed set of rules. It is advisable to include these topics in the proposal. In particular, it will be helpful to clarify how such returns, received by an ETF, ETN or funds engaging in such activities, would be treated for the end investors; and if this will vary in any principle from how existing ETFs returns are treated for tax purposes.
Ultimately, the proposals should relieve the administrative burdens and costs for users of DeFi, while promoting legal and regulatory clarity. This will give comfort for users and investors to participate in DeFi and foster the industry as a whole.
Our team continues to track regulatory developments across the globe and is working hard to ensure that as more regulatory clarity becomes a reality for crypto, regulations will allow investors to access this market without unnecessary burdens.
For more on our perspectives regarding global regulation, please visit our Insights hub.
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