The taxation unit of the U.K.’s Treasury is mulling over the possibilities of floating a new tax law for decentralized finance (DeFi) in the country amid increasing regulatory activity in the industry.
The consultation will be carried out by HM Revenue and Customs, seeking public comments from investors, service providers, and professionals in the DeFi space. According to the public disclosure, the tax department will entertain comments from April 27 to June 22 on its proposed DeFi tax rules.
The proposal seeks to place a premium on DeFi lending and staking but could be expanded to other facets of the ecosystem. The move aims to improve the present state of digital currencies to achieve greater levels of compliance for all parties, according to the department.
“To reduce the administrative burden for participants, the new tax framework could treat all DeFi returns as being revenue in nature and charged to a new miscellaneous income charge specific for cryptoasset transactions,” the document read.
Under the proposed rules, the government is keen on eliminating capital gains tax from the disposal of assets when digital currencies are staked or lent on DeFi platforms. Conversely, investors will pay capital gain tax in the event of economic disposals such as an outright sale or in exchange for goods and services.
The bill outlines several conditions to be satisfied before a transaction qualifies as a DeFi transaction. Per the proposal, capital gains tax will apply if the borrower cannot return the tokens, and DeFi returns arising before a sale of the rights are taxable on the lender at the time of sale.
Plans for a new tax regime for digital currencies have been underway since July 2022, when the government launched the first iteration of public comments. After the second consultative process, the next stages in the blueprint are the drafting of the legislation, implementation, and monitoring and review stages.
All hands on deck for digital asset regulation in the UK
Amid the flurry of regulatory activities, the government has indicated an interest in collaborating with digital asset service providers in the country. Sarah Pritchard, executive director of the Financial Conduct Authority, disclosed that working in synergy with service providers will provide a myriad of benefits for the local ecosystem.
“Let’s work together, to shape our rules and regulations to benefit markets, consumers and firms as crypto goes from niche to mainstream,” Pritchard said. “We want [the] industry’s input to make sure we get the future regulatory regime for cryptoassets right.”
Pritchard added that service providers will not be caught off guard by new regulations if they participate in the process from the onset. Presently, the U.K. has several consultative processes underway to encourage the public to participate in the regulatory process.
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