UK Proposes DeFi Tax Overhaul with “No Gain, No Loss” Framework

The UK has advanced plans to modernize taxation for decentralized finance, introducing a framework that delays capital gains taxes until the underlying tokens are sold. The system, referred to as “no gain, no loss,” would apply to crypto lending, borrowing, and liquidity pool deposits, aiming to better match tax obligations with the actual economic outcomes of DeFi activities.

Under the proposed framework, taxable gains or losses would be calculated when tokens are redeemed from a protocol, based on the difference between the number of tokens returned and the original deposit. This approach replaces the current system, where depositing funds into a DeFi protocol can immediately trigger capital gains tax, with rates ranging from 18% to 32% depending on individual circumstances.

The reform intends to provide clarity for DeFi users by ensuring that taxation aligns with real gains and losses. It also reflects a broader effort to make the UK a more accommodating jurisdiction for digital finance innovation while maintaining compliance and transparency standards.

The proposal remains under review, with HM Revenue and Customs engaging with stakeholders to evaluate its viability and to ensure it covers the variety of transactions possible within DeFi protocols. The consultation included feedback from exchanges, investment firms, and industry bodies, highlighting both the interest in and the complexity of implementing a tax system suited to emerging decentralized financial products.

If enacted, the framework would mark a significant step toward simplifying DeFi taxation and aligning regulatory practice with the mechanics of decentralized financial platforms.