DeFi Borrowing Tax Treatment
How HMRC treats DeFi borrowing — acquisition cost, disposal on repayment, and why interest is not deductible against capital gains.
DeFi Borrowing — Tax Treatment
When a user borrows crypto from a DeFi protocol (e.g. borrowing USDC from Aave), they are making an acquisition — not a disposal.
The Acquisition
The borrower's obligation to repay the tokens to the protocol in the future is treated as "money's worth" and becomes the acquisition cost of the borrowed tokens.
Example: You borrow 10,000 USDC (worth ~£8,000 at the time). The acquisition cost of those 10,000 USDC is £8,000.
What Happens to the Borrowed Tokens
- If the borrower sells, swaps, or otherwise disposes of the borrowed tokens, that is a separate CGT event — gains/losses are calculated as normal using the acquisition cost established above.
- If the borrower repays the loan by returning the same quantity of tokens, this is a disposal of those tokens.
Interest Payments on the Loan
This is a frequently misunderstood area:
- Interest paid in crypto tokens is a disposal of those tokens for CGT purposes.
- The interest cost itself is NOT an allowable deduction against capital gains (it does not satisfy s.38 TCGA 1992).
- For businesses, interest may be deductible under the loan relationships rules (CTA 2009, Part 5).
Practical Implications
Many DeFi users borrow stablecoins against volatile assets (e.g. borrow USDC against ETH collateral). The borrowed stablecoins have an acquisition cost. If you sell them for GBP at roughly the same value, the gain is minimal. But you still need to track and report the transaction.
The key trap is the interest: paying interest in crypto is itself a taxable disposal. You cannot offset that interest cost against your capital gains.
HMRC CRYPTO61630 — DeFi borrowing (Chargeable Gains).
TCGA 1992, s.38 — Allowable expenditure.
Explain Like I'm 5
Borrowing digital coins is like borrowing sweets from the sweetshop. The sweets you get are now yours, and you promise to give the same number back later. If you eat or trade those sweets, that counts separately. When you give sweets back, that counts too. And the extra sweets you pay as interest? You cannot use those to reduce what you owe the government.
Key Takeaways
- Borrowing crypto is an acquisition — the obligation to repay is the acquisition cost ('money's worth').
- Disposing of borrowed tokens (selling, swapping) is a separate CGT event.
- Repaying the loan is a disposal of the tokens used to repay.
- Interest paid in crypto is a disposal, but interest costs are NOT deductible against capital gains.
Educational only - not financial advice