UK Tax Authority to Defer Capital Gains Tax on Crypto Lending, Liquidity Pools

HM Revenue & Customs will apply a "no gain, no loss" tax treatment to crypto lending and liquidity pool transactions, deferring capital gains tax until an actual economic disposal occurs.

The U.K. government announced the measure in a policy paper on July 14, The Block reported. The rules will take effect on April 6, 2027, and apply to individuals and trustees involved in crypto lending and liquidity pool arrangements.

The new rules cover three cases. In single-asset crypto lending arrangements, depositing and receiving back the same type of crypto asset while earning interest will be treated as a no-gain, no-loss transaction. In borrowing transactions, borrowed crypto will be treated as acquired at its market value at the time of borrowing, while assets posted as collateral will be excluded from capital gains tax calculations. In smart contract-based automated market maker, or AMM, liquidity pools, depositing the same type of crypto asset and receiving a pool interest in return will also qualify for no-gain, no-loss treatment.

On withdrawal from an AMM pool, that treatment will continue as long as the amount returned matches the original amount deposited. If there is a difference between the amount deposited and the amount withdrawn, gain or loss will be recognized only on that difference.

HMRC said the change is intended to address problems stemming from its 2022 guidance. Stakeholders had repeatedly raised concerns that the interpretation imposed excessive administrative burdens on taxpayers. HMRC gathered feedback from July to August 2022 and held a public consultation from April to June 2023. It also set out the policy direction in the 2025 budget.

The measure will affect about 700,000 people involved in crypto lending and liquidity pool transactions. Under current U.K. tax law, crypto assets are treated as investment assets and are subject to capital gains tax when sold, exchanged or used. The tax rate is 18% for basic-rate taxpayers and 24% for higher-rate taxpayers. The new measure changes that disposal-based tax treatment only for certain lending and liquidity pool transactions.