As DeFi (Decentralised Finance) continues to reshape how investors earn, lend, and stake their digital assets, UK taxpayers face a growing challenge: how to stay compliant with HMRC’s evolving tax rules. What was once seen as passive crypto activity is now under active scrutiny, and even common DeFi actions like adding liquidity, earning rewards, or using lending platforms can trigger tax obligations.
HMRC’s guidance on DeFi remains complex. Whether your transaction is classified as income or capital can change your tax liability entirely, and it often comes down to the “nature of the transaction”. This makes understanding your obligations critical, especially as the tax office continues to review how staking and lending should be taxed in the future.
In this guide, we break down how different DeFi transactions are currently taxed in the UK, from liquidity mining to crypto loans. If you’re a UK-based crypto investor engaging with DeFi platforms, this article will help you navigate your reporting duties with clarity and confidence.
Read More: Crypto Tax In The UK: The Ultimate Guide
How HMRC Taxes Decentralised Finance (DeFi) In The UK?
HMRC does not treat DeFi transactions as a separate category under UK crypto tax laws. Instead, it evaluates each transaction based on its nature, specifically whether it reflects a capital activity or generates income.
- If a transaction is considered capital in nature, such as swapping tokens or removing liquidity, it may trigger Capital Gains Tax (CGT).
- On the other hand, if you receive regular, identifiable rewards, like yield from lending or staking, those returns may be treated as miscellaneous income and taxed under Income Tax rules.
The key distinction lies in how and when you earn or dispose of assets. For example, providing liquidity might now count as a disposal because HMRC assumes beneficial ownership of the crypto has transferred to the protocol. Similarly, receiving rewards periodically from DeFi platforms, especially if agreed upfront, is more likely to be taxed as income.
This case-by-case approach means crypto investors must review the structure of each DeFi interaction carefully to determine the correct tax treatment and remain compliant with HMRC expectations.
Capital Gains Tax on DeFi
Capital Gains Tax (CGT) is applied when you dispose of a crypto asset through a DeFi transaction. In the eyes of HMRC, a disposal occurs when you sell, swap, spend, or gift your cryptocurrency. This includes many common DeFi actions where you exchange or remove assets.
Which DeFi Transactions Trigger Capital Gains Tax?
Not all DeFi activity is automatically subject to CGT, but many common actions are. Here are typical scenarios where you are likely to incur a capital gain or loss:
- Swapping one cryptocurrency for another on a decentralised exchange (DEX)
- Adding tokens to a liquidity pool and receiving LP tokens in return
- Removing liquidity by redeeming LP tokens for your original capital
- Using wrapped tokens (e.g., converting BTC to wBTC)
- Redeeming staked tokens where the action qualifies as a disposal
- Using tokens as collateral where beneficial ownership transfers to the protocol
How To Calculate Capital Gains on DeFi Transactions?
To calculate Capital Gains Tax on your DeFi transactions, you need to know two key values for each disposal: the cost basis and the disposal proceeds. The difference between them determines whether you made a gain or a loss.
- Cost basis refers to the amount you originally paid to acquire the crypto asset, including any allowable expenses such as gas fees or transfer charges.
- Disposal proceeds represent the fair market value of what you received at the time of the disposal, also denominated in GBP.
Once these values are determined, apply the following formula:
Capital Gain or Loss = Disposal Proceeds – Cost Basis |
If the result is positive, it is a capital gain and may be subject to CGT, depending on your overall gains for the year and available allowances. If it is negative, you may be able to offset the capital loss against other gains in the same year or carry it forward to reduce future tax liability.
Personal Income Tax On DeFi
Personal Income Tax is applied when your DeFi activity results in a return that HMRC considers revenue in nature. These returns typically come in the form of new tokens, coins, or rewards received from lending, staking, or yield farming. If the return is predictable, periodic, or agreed upon in advance, it is more likely to be treated as income rather than a capital gain.
Which DeFi Transactions Trigger Income Tax?
Income Tax is generally triggered by DeFi transactions that generate regular or structured returns. These include:
- Earning staking rewards, particularly when paid at regular intervals
- Receiving fixed returns from DeFi lending or P2P lending platforms
- Yield farming, where rewards are distributed periodically
- Receiving liquidity mining rewards in the form of new tokens
- Periodic DeFi interest payments from platforms or borrowers
How To Calculate Income Tax on DeFi Transactions?
To calculate your DeFi income for tax purposes, you need to record the fair market value of each reward or return at the time you receive it. The valuation must be in GBP, using a reliable exchange rate at the moment of receipt.
The steps to calculate income from DeFi are:
- Identify the exact date and time when the reward or return was received
- Determine the market value of the tokens in GBP at that time
- Record this value as taxable income
- Deduct any allowable expenses, such as transaction fees, if applicable
Note: In some cases, you may be eligible for the £1,000 trading or miscellaneous income allowance, which can reduce or eliminate your tax liability on smaller DeFi earnings. However, this must be actively claimed on your tax return. |
Read More: Personal Income Tax On Crypto In The UK
Tax on DeFi Lending
From HMRC’s perspective, both lending and borrowing crypto can trigger tax obligations depending on how the transaction is structured, especially regarding the concept of beneficial ownership.
For Lenders
When you lend crypto via a DeFi platform and lose beneficial ownership of the asset, HMRC considers it a disposal. This means you may be required to pay Capital Gains Tax at the point you transfer your tokens to the protocol. If your return is fixed or paid periodically, such as in the form of new tokens or stablecoins, it may also be subject to Income Tax.
Here’s how tax applies to a typical DeFi lending arrangement:
- Lending your tokens = Disposal (potential CGT)
- Receiving your tokens back = Acquisition
- Rewards received = Income, if they are predictable or paid by the platform
Lenders must track the value of their loaned crypto at the time of lending and note the GBP value of any returns they receive to ensure accurate reporting.
For Borrowers
Borrowing crypto on a DeFi platform is usually treated as an acquisition, even if you’re not paying for the asset in the traditional sense. When the borrower repays the loan and returns beneficial ownership to the lender, this triggers a disposal, potentially subject to Capital Gains Tax.
Borrowers can also benefit from deducting interest paid on the loan as an allowable expense if it’s part of a taxable activity. However, if collateral was posted and the DeFi protocol took control of it, HMRC would consider that a disposal by the borrower at the time of staking the collateral.
Tax on Staking Through DeFi Protocols
HMRC considers both the act of staking and the rewards earned as potentially taxable events, depending on the structure and frequency of the transactions.
Receiving Staking Rewards
Most staking rewards earned through DeFi platforms are treated as miscellaneous income. If the rewards are received periodically or follow a pre-agreed rate of return, they fall under the scope of Income Tax. You must report the fair market value of the tokens in GBP at the time of receipt, regardless of whether you convert them to fiat or continue to hold them.
For instance, if you stake Ethereum and receive 0.5 ETH monthly as a reward, each of these distributions should be reported as income based on the token’s value when received. These earnings will be taxed according to your income tax band. You may also be eligible for the £1,000 trading or miscellaneous income allowance if applicable.
Token Swaps During Staking
Some DeFi protocols issue a separate token representing your staked position, such as stETH when staking ETH through Lido. In such cases, the exchange of ETH for stETH is considered a disposal, triggering Capital Gains Tax. This applies even if the transaction is not a traditional sale but a swap that results in a change of beneficial ownership.
Later, when you redeem or sell the staked token, a second CGT event occurs. You must calculate the gain or loss based on the difference between the acquisition cost and the fair market value at disposal.
Read More: How To Save Crypto Taxes In The UK
Tax on Yield Farming in the UK
Whether you’re earning new tokens, adding liquidity, or reinvesting rewards, your tax treatment will depend on how and when you realise value from your assets.
Earning Rewards from Yield Farming
When you earn tokens through yield farming, such as incentive tokens or platform rewards, these are usually treated as miscellaneous income. If you receive them periodically or based on a predefined yield structure, HMRC expects you to report the GBP value at the time of receipt. This amount is taxed as part of your income, and you may be able to claim the £1,000 trading or miscellaneous income allowance, depending on the circumstances.
Swapping or Reinvesting Tokens
If you swap or reinvest yield farming rewards into other assets or protocols, each of these disposals triggers a Capital Gains Tax event. For example, exchanging reward tokens for another asset or reinvesting them into a liquidity pool is viewed as a disposal. You’ll need to calculate your gain or loss based on the original acquisition cost and the token’s GBP value at the time of the new transaction.
Tax On Liquidity Mining and LP Tokens
While liquidity mining may seem like a simple way to earn passive income, HMRC considers both the entry and exit of these pools as taxable events. Additionally, any rewards earned from liquidity mining may also trigger Income Tax. Here’s how these transactions are taxed.
Providing Liquidity to Pools
When you add crypto to a liquidity pool and receive LP (liquidity provider) tokens in return, HMRC treats this as a disposal. Since beneficial ownership of your original tokens is transferred to the DeFi protocol, this action is considered a crypto-to-crypto swap. As a result, you must calculate Capital Gains Tax at the time of the transaction. The LP tokens received in return are treated as a new acquisition and will form the basis for any future gain or loss calculation.
Removing Liquidity from Pools
Withdrawing your funds from a liquidity pool involves redeeming your LP tokens for the original crypto assets. This redemption is another disposal event under HMRC rules and may result in a gain or loss based on the difference between the acquisition cost of the LP tokens and their value at the time of removal. You must report this event even if you receive the same type of tokens back, as the value may have changed.
Earning Liquidity Mining Rewards
If you receive additional tokens or incentives as rewards for providing liquidity, these are typically treated as income. The GBP value of the tokens at the time of receipt must be reported as miscellaneous income. If the reward structure is periodic or based on a fixed rate, it is even more likely to fall under Income Tax. These income events are separate from any capital gains realised through liquidity provision and should be reported accordingly.
Tax On Collateral for DeFi Lending
Collateralised lending is a core feature of DeFi protocols, allowing users to lock up their crypto assets in exchange for loans. However, HMRC views some of these actions as disposals, depending on whether the platform gains access to or control over your collateral.
Locking Collateral That Transfers Beneficial Ownership
If the DeFi protocol or borrower has full control over the collateral you provide, HMRC considers this a disposal of your crypto. Since beneficial ownership changes hands, you must report the transaction for Capital Gains Tax purposes. The gain or loss is calculated based on the difference between the acquisition cost of the asset and its fair market value when the collateral was locked into the platform.
Locking Collateral Without Transferring Ownership
In rare cases where the platform cannot access or utilise your collateral, and beneficial ownership remains with you, the transaction is not treated as a disposal. As a result, there is no immediate tax obligation. This structure is uncommon in most lending protocols, so it’s essential to carefully review the terms of the smart contract to determine whether a taxable event has occurred.
Retrieving or Losing Collateral
When you retrieve your collateral after loan repayment, it is treated as a new acquisition if it was previously recorded as a disposal. You must record the asset’s market value at the time of return as its new cost basis. If the loan is liquidated and the collateral is not returned, no new CGT event occurs because the disposal was already taxed when the collateral was initially locked.
Tax On Wrapping Tokens
Wrapped tokens may seem like a technical action with no financial gain, HMRC may view wrapping and unwrapping tokens taxable depending on the transaction structure.
Wrapping One Token into Another
Wrapping a token typically involves exchanging your original asset for a synthetic version on another blockchain. HMRC may view this as a crypto-to-crypto swap, which qualifies as a disposal under existing tax rules. You must calculate any capital gain or loss based on the difference between your original acquisition cost and the fair market value of the wrapped token at the time of wrapping.
Unwrapping Tokens Back to the Original Asset
Unwrapping is the reverse process of reclaiming the original token. Since this involves disposing of the wrapped token, HMRC may also treat it as a new CGT event. You’ll need to calculate any gain or loss based on the cost basis of the wrapped token and its market value when converted back.
Tax On Gas and Transaction Fees
HMRC recognises these fees as allowable expenses, but only when they are directly related to the disposal or acquisition of an asset. Let’s break down when and how these fees can reduce your tax liability.
Paying Gas Fees During a Token Disposal
When you pay gas fees as part of a taxable event, such as selling, swapping, or gifting crypto, those fees can be added to the asset’s cost basis. This helps reduce your overall gain and therefore lowers your Capital Gains Tax liability. For example, if you sell a token for £1,000 and paid £30 in gas fees to execute the transaction, you can deduct that £30 from your proceeds when calculating the gain.
Note: To apply this deduction correctly, you must document the exact fee paid and link it to the relevant disposal. This ensures that your tax report remains HMRC-compliant. |
Paying Gas Fees for Non-Taxable Transactions
Gas fees incurred during non-taxable events, such as transferring tokens between your own wallets or simply approving a token for staking, are generally not deductible. HMRC only allows deductions for expenses that are wholly and exclusively incurred during a disposal or acquisition event. Therefore, routine fees that don’t directly relate to the sale or exchange of an asset cannot be used to reduce your tax burden.
How KoinX Helps You Calculate DeFi Taxes?
DeFi transactions can be complex, often involving multiple wallets, protocols, and tax events in a single interaction. From liquidity provision and staking to wrapping tokens and receiving rewards, tracking and calculating taxes manually can be overwhelming. That’s where KoinX comes in, offering an efficient, compliant, and automated way to manage your DeFi tax obligations. Here’s what it offers:
Imports Transactions from All Major Wallets and Protocols
KoinX integrates seamlessly with a wide range of DeFi wallets and platforms. Whether you’re using MetaMask, Trust Wallet, or interacting with protocols like Aave, Uniswap, or Lido, KoinX can import all your transactions via API or CSV uploads. This centralised approach ensures no activity is left unaccounted for when calculating your tax liabilities.
Automatically Classifies DeFi Activities
KoinX intelligently identifies and categorises each transaction type based on HMRC’s latest guidance. It distinguishes between staking, lending, swaps, wrapping, yield farming, and other DeFi actions. By applying the correct tax rules, Income Tax or Capital Gains Tax.
Calculates Gains, Losses, and Income in GBP
Since HMRC requires all crypto reporting in GBP, KoinX converts your DeFi transactions to GBP using reliable historic price data. It calculates capital gains and losses using the UK’s share pooling method and also tracks income received through staking or lending protocols. This ensures your figures are compliant with HMRC standards.
Generates HMRC-Ready Tax Reports
Once your DeFi data is processed, KoinX generates downloadable tax reports, including Capital Gains Summary, Income Reports, and complete transaction logs. These reports are designed to be submitted with your Self Assessment tax return, either online through the Government Gateway or through an accountant.
So, stop stressing about DeFi taxes anymore, let KoinX handle the complexity while you stay compliant with ease.
Conclusion
As DeFi continues to evolve, so do the tax implications that come with it. From staking rewards and yield farming to liquidity provision and wrapped tokens, each action can carry a different tax treatment under HMRC’s rules. Staying compliant means keeping detailed records, understanding which transactions trigger tax, and reporting everything accurately in your Self Assessment return.
If you are finding DeFi taxes difficult to manage, try KoinX. Its automated transaction tracking, smart classification, and HMRC-ready reports, makes DeFi tax reporting simple and stress-free. Join KoinX today and take the guesswork out of your UK DeFi taxes—so you can focus on growing your portfolio with full peace of mind.
Frequently Asked Questions
What Is Beneficial Ownership and Why Does It Matter?
Beneficial ownership refers to who has control or economic benefit over a crypto asset. In DeFi, if a protocol gains beneficial ownership when you stake or lend your tokens, HMRC may consider it a disposal. This can trigger Capital Gains Tax, even if you haven’t sold the asset. Understanding beneficial ownership helps determine whether a transaction is taxable.
Can I Report DeFi Income Under the Trading Allowance?
Yes, if your DeFi earnings qualify as miscellaneous income and total £1,000 or less in a tax year, you can use the trading allowance. This means you won’t pay Income Tax on those earnings. However, this allowance does not apply to capital gains. If your rewards exceed the threshold or include disposals, a full tax report is required.
What Happens If I Don’t Report DeFi Transactions?
Failing to report DeFi transactions can lead to penalties, interest, and a possible HMRC enquiry. If undeclared gains or income are discovered, you may face a fine starting at £100, with additional charges depending on the delay. HMRC treats crypto seriously, so accurate reporting of staking, lending, or liquidity actions is necessary to stay compliant with UK tax laws
