The UK has signaled a major shift in how it plans to tax DeFi, backing a “no win, no lose” idea that could end so-called dry tax bills for everyday users.
The government, through HM Revenue & Customs, says it is developing rules to deal with many DeFi loans and liquidity pool movements on a no-win, no-loss basis. This would delay capital gains tax until there is an actual sale or exchange, not just when tokens move in and out of a protocol.
The proposal was flagged alongside Wednesday’s budget, November 26, and set out in a consultation outcome published this week.
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Officials say the goal is to align the tax with how DeFi actually works and reduce reporting that can hit users even when nothing has actually been “sold.” Currently, people can be taxed only for depositing tokens and then withdrawing them.
HMRC says it is developing an approach that treats certain disposals as no gain or no loss, and it may also extend this approach to automated market makers. The ministry adds that it will continue to examine the arguments in favor of changing the law. For now, this is a plan in motion, not a rule on the books.
HMRC guidance divides the use of DeFi into three areas: single token setups, crypto lending and automated market makers, also known as AMMs.
If you deposit and subsequently withdraw the same single token, HMRC will still treat both actions as transfers. But they would fall under the “no win, no lose” rule. This means that there is no tax to pay at that time. You only realize your profit or loss later when you actually sell the tokens you received.
When using crypto as collateral to borrow, HMRC takes a lighter approach. Taking out the loan and locking up your tokens would not incur capital gains tax.
The tax only comes into play if you sell the borrowed crypto and buy it back later to repay the loan. In this case, HMRC would calculate any gain or loss based on this buying and selling cycle.
For AMMs and other pools involving more than one token, deposits would also be processed under the “no win, no loss” rule. But things change when you leave. The tax situation then depends on what you get back from the pool and whether it matches what you initially invested.
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If users leave a pool with more or fewer tokens than they staked, the difference will count as a taxable gain or loss.
If users are given the same number, HMRC treats the output as ‘no gain, no loss’ and no tax is due at this stage.
