UK Considers Taxation Revisions for DeFi Lending and Staking Activities – Here's The Latest
Among the measures announced was to explore and resolve issues on taxation of DeFi lending and staking.
Rapid growth in DeFi-focused Ethereum liquid staking derivatives platforms raises eyebrows
Rapid growth in DeFi-focused Ethereum liquid staking derivatives platforms raises eyebrows
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Ether’s (ETH) DeFi activity has declined in the bear market and the sector faces further competition from Ethereum’s annual staking reward of 4%, according to Glassnode analysts. However, a DeFi narrative is building around liquid staking derivative (LSD) tokens that could revive Ethereum’s network activity. The percentage of gas consumed by DeFi protocols has dropped from 34% in 2020 to 8% to 16% presently, with NFTs commanding the maximum share of 25% to 30%, according to a recent report from Glassnode. Ethereum gas usage by transaction type. Source: glassnode Glassnode’s supply-weighted price index for DeFi, priced in USD and ETH, recorded a 90% loss since early 2021. The so-called DeFi “Blue-Chips,” which represents a basket of governance tokens from well known DeFi protocols like Uniswap (UNI), MakerDAO (MKR), Aave (AAVE), Compound (COMP), Balancer (BAL) and SushiSwap (SUSHI), have lost 88% of their market capitalization from the all-time highs of $45 billion in May 2021. ETH vs DeFi tokens price performance. Source: glassnode The DeFi blue chip tokens have underperformed ETH during bullish market rallies and experienced a more severe drop than ETH “on the downside during the bear.” The analysts predict that since staking of ETH now yields 4%, it will act as a “new hurdle rate over which token returns must jump.” This yield represents the benchmark rate for ether investors. Currently, leading lending protocols like Aave and Compound offer between 2-3% yields on lending stablecoins and ether. Moreover, DeFi protocols like Aave and Compound also come with smart contract risk which is eliminated with proof-of-stake (PoS) validators. Staking has become popular among Ethereum investors, especially after the Shapella upgrade in April 2023, which enabled redemptions from the staking contract. By the end of May, Ethereum users staked 21.63 million ETH worth $40.021 billion, representing 18% of Ethereum’s total supply. LSD platforms like Lido and Rocket Pool account for one third of this massive market. These applications offer tokenized representation of staked ETH, allowing investors access to the staking yields without compromising liquidity. A growing trend among Ethereum investors is interacting with LSD-fi or LSD financialization, which aims to put the liquidity offered by the LSD tokens to use in DeFi applications. Related: LSD for DeFi: Tenet, LayerZero partner to drive cross-chain liquid staking adoption Is LSDfi the solution? Essentially, LSDfi leverages the liquidity of LSD tokens into DeFi like lending protocols and liquidity on exchanges for higher yields. Given that a considerable amount of ETH is staked with the LSD platforms, LSDfi has the potential to revive DeFi activity. A Dune analytics dashboard by data analyst Defimochi shows the total value locked (TVL) in LSDfi protocols has touched $411 million, rising exponentially since mid-May. Some of the popular names in the sector are Pendle Finance, Lybra Finance, Curve Finance and Alchemix Protocol. LSDfi total value locked. Source: Dune The liquidity of LSD tokens on Curve Finance, the largest stablecoin exchange in the market, has surpassed $1.5 billion. Curve also enabled minting of its over-collateralized stablecoin crvUSD using Frax Protocol’s staked-ETH token sfrxETH as collateral. Relatively new protocols like Lybra Finance and Pendle Finance which are looking to leverage the liquidity provided by LSD tokens have also become popular. As it has happened before with DeFi, newer applications will likely tap the liquidity of LSD tokens by facilitating liquidity mining of their governance tokens for early depositors. While these can bring decent gains for some users, these protocols could carry smart contract risks and the chance of getting rug…
Defi, Crypto taxes and HMRC……new rules just too confusing?
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HMRC proposes revised tax rules. This can hurt DeFi and Staking in the UK #cryptonews #innovation
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UK Tax Authority Proposes Changes to Treatment of DeFi Lending, Staking
The proposal, now open for public consultation, will also apply to crypto lending and staking through intermediaries, the authority said.
The U.K.’s tax authority is seeking public views on a proposed change to the tax treatment of decentralized finance (DeFi) lending and staking, according to a Thursday announcement.
HM Revenue and Customs’ (HMRC) proposal follows a 2022 call for evidence. The authority cited recent crypto market failures, including the collapse of the FTX exchange, as cause for regulators’ heightened interest in the sector.
Regulators around the world have cast their eyes on DeFi, and policymakers have “highlighted specific risks including cyber risks and other technical risks, as well as increased dependencies between traditional and decentralized financial systems and a lack of backstops in periods of market stress,” HMRC said.
Under existing rules, DeFi transactions can be treated as disposals to be written off as gifts or sales by lenders or liquidity providers even in cases where ownership of the asset doesn’t change.
“This can lead to tax outcomes that do not reflect the underlying economic substance, and to a tax liability from a transaction where no gain has been realized in a form which can be used to meet the liability,” according to the consultation document. “The need to determine and record the market value of assets at each step in the transaction may also give rise to a disproportionate administrative burden.”
The proposed changes would ensure DeFi transactions are not treated as a disposals for tax purposes. That would occur only when crypto assets are “economically disposed of in a non-DeFi transaction,” the consultation said.
The new framework could also end up treating “all DeFi returns as being revenue in nature,” and subject to a “new miscellaneous income charge,” to avoid administrative burdens.
Though the proposed framework is targeting DeFi lending and staking, it is also intended to apply for centralized finance (CeFi), where crypto lending or staking is conducted through intermediaries, the document said.
The HMRC has previously extended existing tax rules to crypto, including a tax break for foreign investors purchasing crypto through local agents.
The consultation is open for eight weeks and closes on June 22.
https://www.coindesk.com/policy/2023/04/27/uk-tax-authority-proposes-legislative-change-to-treatment-of-defi-lending-staking/
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