HM Revenue & Customs headquarters at 100 Parliament Street in London

Britain Just Proposed a Major DeFi Tax Fix. The Relief Has a Boundary

By Isaac • July 14, 2026 9:19 am • Comments

Britain has spent years treating some DeFi transfers as if the investor had already cashed out.

HM Revenue & Customs now wants the tax point to follow the economics more closely.

Draft legislation published Monday would give certain crypto loans and liquidity-pool transactions “no gain, no loss” treatment. The proposal defers Capital Gains Tax when an eligible user enters or exits a qualifying arrangement without making an economic disposal.

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The gain stays in the tax system. The bill moves to the point when the investor actually parts with the economic exposure.

That is a substantial change for people who lend tokens, borrow them or supply assets to an automated market maker.

It is also a scoped change with a start date, asset definitions and transaction tests that will leave some activity outside the relief.

The HM Revenue & Customs policy paper says the measure will apply to individuals and trustees and affect about 700,000 people involved in cryptoasset loans and liquidity pools.

HMRC traced the problem to guidance it published in 2022. Under the current approach, transferring beneficial ownership of tokens into a protocol can create a disposal for Capital Gains Tax even when the user expects to receive the same type of asset back.

That can crystallize a paper gain at entry, create a new cost basis and produce a tax obligation before the investor receives cash.

The government consulted on alternatives in 2022 and 2023, then chose a no-gain-no-loss structure designed to preserve the gain while deferring recognition.

The operative date is April 6, 2027.

Transactions before then remain under the existing rules unless the final legislation provides a specific transition.

No-gain-no-loss treatment works by carrying the original economic cost forward.

Consider an investor who bought one ETH for 1,000 GBP and later placed it into a qualifying lending arrangement when it was valued at 1,800 GBP.

The current approach can treat the transfer as a disposal, depending on the beneficial-ownership terms. The draft would allow that qualifying entry to occur without recognizing the 800 GBP gain at that moment.

If the investor later receives the same quantity of eligible ETH back, the original basis follows the position. A later sale for 2,000 GBP would bring the deferred gain into the Capital Gains Tax calculation.

The timing changes. The underlying appreciation remains taxable.

HMRC built the proposal around three transaction types.

Single-asset lending covers an arrangement where an individual or trustee has a right to receive a number of qualifying cryptoassets and a return. The structure must be economically equivalent to lending.

Entering the arrangement with the same type of qualifying asset can receive no-gain-no-loss treatment. Returning the matching asset can receive corresponding treatment on exit.

Single-asset borrowing receives different mechanics.

The borrower is treated as acquiring the borrowed tokens at market value when the loan begins. Returning the same type of asset is treated at that same value, while collateral provided under the qualifying borrowing arrangement is disregarded for Capital Gains Tax.

That structure stops the loan itself from manufacturing a gain or loss merely because the asset moved between lender and borrower.

Automated market makers create the hardest calculation.

The policy paper defines the covered arrangement as a smart-contract pool in which the user holds rights to two or more types of qualifying cryptoassets.

Entry can receive no-gain-no-loss treatment when the contributed tokens match the types represented by the pool interest.

Exit is more precise. The relief applies to the extent the user receives the same quantities originally invested.

Any excess or shortfall can produce a gain or loss by reference to the difference.

That rule acknowledges how automated market makers rebalance inventory as traders use the pool. A liquidity provider may deposit one mix and withdraw another after price changes and fees alter the position.

The draft avoids pretending that every withdrawal is economically identical to the deposit.

The published legislative text adds several boundaries that deserve as much attention as the relief. It defines the people, assets and arrangements that can use the new treatment instead of extending it across DeFi as a whole.

It applies to a “person other than a company.” HMRC’s impact note identifies individuals and trustees as the affected groups, estimates that roughly 700,000 people could be affected and says the measure is not expected to affect businesses or civil-society organizations.

The asset must also qualify under a statutory definition that separates covered cryptoassets from conventional securities and many tokenized claims.

The draft excludes securities and most tokenized assets from the base definition, then includes detailed exceptions for certain crypto-linked rights and eligible stablecoins. Eligibility follows the legal rights encoded in the asset, and later Treasury amendments would require regulations approved by the House of Commons.

The qualifying-asset list can evolve without turning the initial relief into an undefined exemption.

Single-asset lending arrangements must be genuine commercial arrangements. They also need to meet a low-risk-of-loss condition and either an unconnected-parties condition or a widely-available condition.

A bespoke transfer to a connected party, a structure with significant repayment risk or a wrapper designed mainly to exploit the tax treatment may fail those tests.

The final measure names lending, borrowing and automated market making. It does not publish a general Capital Gains Tax holiday for staking, bridges, vault strategies, restaking or every protocol that uses the word “earn.”

Each arrangement has to fit the statutory lane.

The AMM lane has its own access test. A substantial number of independent users must be able to trade the invested asset types through the smart contract.

Income remains a separate issue.

HMRC’s current cryptoassets manual says the tax treatment of a lender or liquidity provider’s return depends on the circumstances, including whether the activity amounts to a trade. For individuals, HMRC says trading status arises only in exceptional cases, so many returns will be analyzed as investment income instead.

Deferring a capital gain on the contributed tokens does not erase tax on interest, fees, rewards or other returns. The character of that income still needs to be determined from the agreement, the source of the payment and the user’s wider activity.

Record keeping also survives the reform.

Users will need the original acquisition cost, the quantity and type of each token entering an arrangement, the value and composition of assets received on exit, and a record showing why the arrangement qualified. Those records must preserve both the deferred capital basis and any separately taxable yield.

Liquidity-pool users may face fewer artificial disposal events while still carrying a detailed basis through multiple positions.

HMRC also says individuals will only amount to a trade in exceptional circumstances. That classification can change how returns are taxed and reported, so the capital-gains relief cannot settle the whole tax position.

The reform has a broader competitive effect.

A tax system that recognizes a gain every time legal title shifts inside a smart contract makes ordinary protocol use harder to track, harder to explain and easier to avoid altogether.

Moving the tax point toward an economic disposal gives UK users a rule that more closely resembles their actual position.

It also gives protocols and tax software a clearer target. They can design reporting around qualifying entries, matching exits, returns and true disposals instead of treating every transfer as a sale.

Parliament still has to enact the measure, and the draft can change before April 2027.

The current text already establishes the direction: Britain wants to tax the gain when the economics change.

That is a real fix.

The eligibility boundary is the price of keeping the fix intact.

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