So far, apart from , the UK has not really seen any tax legislation dealing specifically with cryptoassets. Instead, it has relied upon existing tax laws, and guidance that attempts to apply these laws to the new possibilities thrown up by modern technology.
However, that will soon be changing, as the government has recently published draft legislation setting out two helpful changes to tax law, specifically in relation to cryptoassets.
This article sets out one of those changes, relating to loans and liquidity pools. The other change, relating to stablecoins, is covered in a separate article.
Capital Gains Tax on Cryptoasset Lending
Individuals may be subject to Capital Gains Tax (CGT) when they dispose of a cryptoasset. This might be because they have sold a cryptoasset, or gifted it to another person. However, the application of traditional English legal principles here means that a person will also be making a disposal (and therefore potentially triggering a CGT charge) when they make a loan of a cryptoasset.
This tax treatment is one that would come as a surprise to many taxpayers (and likely many of their advisors), and does not really reflect the economic reality of the transaction in which the lender expects to receive the same value of cryptoassets back at the end of the loan. Therefore, there have been calls for reform to address this point.
The government originally ran a call for evidence on this point back in 2022. Since then there have been a further consultation and various HMRC working groups, which Jack Burroughs of Quastels’ Private Wealth and Tax Team attended, as the details of the proposed reform were worked out.
What’s Changing
We now have draft legislation, which is due to form part of the Finance Bill and take effect from 6 April 2027 (although the government is still considering whether it should be made retrospective). It addresses this situation by means of a ‘no gain, no loss’ treatment.
The new law can be illustrated with a simple example:
- Alice enters into a contract with Bob, by which she transfers 100 ETH to him, in return for the return of 110 ETH in a year’s time; and
- After a year, Bob repays 110 ETH to Alice.
Under the current law, at the point of the initial loan, Alice would have been subject to CGT if the value of the ETH at that time was more than she had paid for it. However, under the new draft law, there will be no CGT at that point, since Alice is treated as having disposed of her ETH for the same price as she paid for it.
When Bob repays the 110 ETH to Alice, she is then disposing of her right to receive the repayment. The 100 ETH representing the original loan are received tax free. However, there will be CGT payable on the additional 10 ETH return, which is treated as Alice’s gain.
Of course, in practice many DeFi transactions will be a lot more complicated than this simple example. These include the deposit of cryptoassets into a smart contract liquidity pool, which is dealt with in a separate part of the legislation. There are also various conditions that must be met in order for the new rules to apply, including a ‘low-risk-of-loss condition’ and either the ‘unconnected parties condition’ or the ‘widely available condition’. Therefore, it will be important to take advice to properly understand how the rules apply to your own specific circumstances. The cryptoasset tax specialists in the Private Wealth and Tax Team at Quastels will be happy to help.
