DeFi Tax UK: How HMRC Taxes Lending, Staking, and Liquidity
DeFi (Decentralised Finance) creates complex tax situations because HMRC treats each interaction with a smart contract as a potential taxable event. The key question for lending and staking is beneficial ownership — do you retain control of your tokens, or has ownership transferred?
Lending: If the protocol can use, lend out, or rehypothecate your tokens, HMRC may treat the deposit as a disposal (triggering CGT). If the protocol merely holds custody without using them, it is likely not a disposal. Most DeFi lending protocols (Aave, Compound) fall into the first category.
Staking rewards are generally taxed as miscellaneous income when received. The income amount is the market value at the time of receipt. This then becomes your cost basis for future CGT calculations when you eventually sell.
Liquidity provision involves depositing two tokens into a pool. Receiving LP tokens in return is likely a disposal of both original tokens. Impermanent loss does not create a separate tax loss — it is factored into the gain or loss when you withdraw.
Frequently Asked Questions
Are wrapped tokens taxable?
Potentially. Wrapping a token (e.g. ETH to WETH) could be treated as a disposal if the wrapping mechanism involves transferring beneficial ownership. HMRC has not issued definitive guidance on this.
Is borrowing against crypto taxable?
The borrowing itself is not taxable. However, providing collateral may be a disposal (depending on whether the protocol has beneficial ownership), and any liquidation of collateral is definitely a disposal.
Learn more in our free courses
Try these free tools
Related guides
Put your knowledge into practice
CoreFi tracks your finances, calculates your tax, and helps you build wealth. Free to start.
Get started freeEducational only. Not financial, tax, or legal advice. CoreFi is not regulated by the FCA.