The central point about DeFi tax in the UK is counter-intuitive and expensive: depositing tokens into a protocol can itself be a disposal. Not the withdrawal. Not the sale. The deposit. HMRC’s position at CRYPTO61620 is that where making a loan or providing liquidity results in you “transferring their beneficial ownership of the tokens to the borrower/DeFi lending platform, this will give rise to a disposal of the loaned/staked tokens” — at market value, in sterling, on the day. You may have no fiat, no realised profit and no intention to sell, and still owe Capital Gains Tax. This is what practitioners call a dry tax charge, and it is the single largest source of unexpected crypto tax bills in the UK.
How HMRC frames DeFi — and why none of the usual words apply
HMRC begins by stripping out the vocabulary. CRYPTO61120 states that “there’s no statutory or legal meaning of the terms ‘lending’ and ‘staking’ in this context”. It then defines a loan as transferring control of tokens to a borrower with a right to equivalent tokens back, and staking or providing liquidity as transferring control to a platform and receiving different tokens in return.
Critically, the return you earn is not interest. CRYPTO61110 is explicit: HMRC “does not consider the return received by the lender to be interest for tax purposes”, because interest is a return for the use of money and HMRC does not treat cryptoassets as money. The consequences are practical: no savings-income treatment, no personal savings allowance, none of the reliefs that attach to interest.
The beneficial ownership test — the question that decides everything
Whether your deposit was a disposal turns on one question: did the recipient acquire beneficial ownership? HMRC gives indicators rather than rules. If “the recipient of the tokens has the ability to deal with the tokens received as they want”, beneficial ownership has passed. If “the recipient is specifically restricted from dealing with the tokens received, this will be a strong indicator that the recipient does not have beneficial ownership”.
HMRC has published no view on any named protocol. The answer depends on the terms and conditions and the smart-contract mechanics of the specific arrangement you used — which is precisely the analysis we do.
Activity-by-activity treatment
| Activity | Disposal on entry? | How the return is taxed |
|---|---|---|
| Lending tokens to a protocol (Aave, Compound-style) | Yes, where beneficial ownership passes to the borrower or platform — the usual outcome for pooled lending | Revenue in nature and not trading: miscellaneous income under the sweep-up in ss.687–689 ITTOIA 2005. An agreed rate and recurring payments point to income; uncertain, speculative proceeds point to capital. |
| Providing liquidity to an AMM and receiving an LP token | Usually yes — you give up two assets and receive a different one | Depends on whether the return is a service reward (income) or capital growth realised on the LP token. HMRC says no single factor is decisive. |
| Yield farming — staking LP tokens for a further reward | Potentially a second disposal, of the LP token | Reward tokens are income on receipt at sterling value, and acquire a base cost equal to that value. |
| Borrowing against your crypto | The collateral deposit may be a disposal on the same test; the borrowing itself is not income | Repayment and liquidation both produce further chargeable events. Liquidation is a disposal at the liquidation price, frequently at a loss the borrower never records. |
| Wrapping tokens (ETH to wETH and back) | Not addressed by HMRC. On ordinary principles, exchanging one token for a different token is a disposal — and wETH is a different token | No return. The risk here is purely the unrecognised disposal, repeated on every wrap and unwrap. |
| Bridging across chains | HMRC says outright that it “will depend on the facts” (CRYPTO22110). For one-way irreversible transfers it applies s.43 TCGA 1992, so the original allowable costs attach to the new asset | — |
| Perpetuals, futures and margin trading | Each closed position is a disposal; funding payments and liquidations add further events | Contracts for differences and derivative positions do not fit the simple pooling model. High-volume derivatives accounts are where the “is this a trade?” question genuinely becomes live. |
Unwinding: two chargeable events per round trip
Getting your tokens back is not the end of it. Under CRYPTO61650, where the quantity of tokens to be returned was ascertainable at the outset, s.48(1) TCGA 1992 applied then, and there is a second disposal under s.22(1) when the tokens come back. Where it was unascertainable, you instead hold a right of the kind considered in Marren v Ingles, which is itself disposed of on receipt. Either way there are two chargeable events per round trip, and losses may need an election to be related back to the earlier disposal.
One escape route that does not work: the repo rules. CRYPTO61610 confirms that s.263A TCGA 1992 applies to sale and repurchase of securities, and “generally tokens will not be securities for this purpose”.
What changes on 6 April 2027
HMRC consulted on this regime in 2023 and published its summary of responses on 26 November 2025. The outcome is a Budget 2025 measure, Tax treatment of Cryptoasset Loans and Liquidity Pools, which will treat certain disposals as no gain, no loss, deferring the CGT charge until an economic disposal actually happens. Three limbs are announced: single-cryptoasset lending; single-cryptoasset borrowing, with collateral disregarded; and automated market making, where exit is no gain, no loss to the extent you receive back the same quantity of cryptoassets you put in, with gain or loss arising on any difference in quantity.
Three things to hold on to. It takes effect on 6 April 2027. It is stated to affect individuals and trustees; the policy paper does not address companies, so corporates should not assume it applies to them. And HMRC estimates roughly 700,000 individuals are affected, which tells you how widespread the current problem is. Until then, the existing analysis applies in full to 2025/26 and 2026/27.
Where the guidance is genuinely unclear — and we will say so
- Whether beneficial ownership passes on any given protocol is a facts-and-circumstances question answered with indicators, not rules, and HMRC has published no protocol-by-protocol view.
- The capital-versus-revenue split for DeFi returns is expressly multi-factorial with no decisive test.
- Liquid staking tokens and restaking are not addressed anywhere in the manual.
- The interaction between the new no gain, no loss rules and the existing manual has not yet been written into the guidance.
- HMRC has published nothing on the VAT treatment of DeFi services.
Where the position is uncertain, the right answer is a documented, reasonable filing position with adequate disclosure — not silence, and not an aggressive claim.
Frequently asked questions
I never sold anything. How can I owe Capital Gains Tax?
Because a disposal for CGT is much broader than a sale. It includes exchanging one token for a different token, and on HMRC’s analysis it can include transferring beneficial ownership into a DeFi protocol. You can therefore have a substantial chargeable gain in a year in which no money reached your bank account.
Is the interest I earn on Aave taxed as savings income?
No. HMRC does not treat it as interest at all, because cryptoassets are not money. Where it is revenue in nature and you are not trading, it falls into the miscellaneous income sweep-up instead — so no personal savings allowance and no savings rates.
Should I just wait until April 2027 for the new rules?
The reform is not retrospective. It does not fix 2021 to 2027, and it does not cover companies. If there is an unreported dry charge in an earlier year, waiting increases the interest and the penalty exposure — particularly with exchange data reaching HMRC from 2027.
Does wrapping ETH really trigger a disposal?
HMRC has not said so directly, which is exactly the problem. On ordinary principles you have exchanged one token for a different one, which is a disposal. In practice the gain is often small because the values track closely — but the event still has to be recorded, and across hundreds of wraps it becomes material.
My protocol liquidated my position. Is that a loss I can use?
Very often yes, and it is one of the most commonly missed reliefs. A forced liquidation is a disposal at the liquidation price. If that produced a capital loss, it can be set against gains in the same year and carried forward — but only if it is identified, computed and claimed.
This page is general guidance on UK tax law as at 9 August 2026 and is not advice for any particular person or situation. Tax treatment depends on your individual circumstances and may change. Where we quote HMRC’s internal manuals, note that those manuals are guidance prepared for HMRC staff, are not law, and do not bind HMRC in an individual case. Please take advice before acting. Reviewed by the TaxDigit crypto tax team · Last reviewed 9 August 2026. Updated August 2026.
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TaxDigit is a UK DeFi and crypto accountant practice. Chartered certified accountants advising liquidity providers, lenders and protocol users on HMRC treatment and reporting.
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