DeFi Tax Guide (UK) – How HMRC Taxes Decentralised Finance

DeFi (Decentralised Finance) is one of the fastest-growing areas in crypto from staking and yield farming to liquidity pools and token swaps. But with growth comes complexity, especially when it comes to tax.

In the UK, HMRC does not treat DeFi activity as tax-free or outside its remit. Quite the opposite HMRC has provided guidance that makes DeFi transactions taxable events in many cases. But determining exactly what to report, when, and how, can be a challenge.

This post goes someway to breaking down the UK DeFi tax rules, helping individuals, investors, and businesses stay compliant.

What Is DeFi?

Decentralised Finance (DeFi) refers to blockchain-based financial services and products that allow users to lend, borrow, earn, trade, or swap digital assets all without needing traditional banks or intermediaries. Instead, DeFi relies on smart contracts, which automate transactions directly on the blockchain.

Some of the most common DeFi activities include:

• Staking – locking your cryptocurrency in a blockchain protocol to help secure the network and, in return, earn staking rewards.
• Yield farming – moving crypto assets between platforms to maximise returns through interest, rewards, or incentives.
• Liquidity provision – supplying tokens to liquidity pools on decentralised exchanges (DEXs) like Uniswap or PancakeSwap, and earning a share of trading fees.
• Lending and borrowing – lending crypto to earn interest or using your crypto as collateral to borrow other assets via smart contracts.
• Airdrops and rewards – receiving free tokens for participating in a project or as part of marketing campaigns.

Key point: Even though these activities operate on decentralised platforms often anonymously and without a central authority they are still taxable in the UK if you are a UK tax resident.

HMRC does not treat crypto as currency but as an asset, and DeFi transactions can give rise to Income Tax or Capital Gains Tax, depending on what you’re doing.

For more detail, see HMRC Cryptoassets Manual which now includes updates on DeFi tax treatment.

Does HMRC Tax DeFi Transactions?

Yes. HMRC considers most DeFi transactions taxable for UK residents either under Capital Gains Tax (CGT) or Income Tax, depending on how the transaction works and why you’re receiving crypto assets.

Key taxes that may apply:

 Important: Even actions like swapping tokens or moving them between DeFi protocols can count as a taxable disposal under HMRC rules. Many crypto investors overlook this and end up with unexpected tax bills.

HMRC generally expects you to keep detailed records of all transactions, including dates, market values in GBP, transaction fees, and what each transaction represents.

For official guidance, see the HMRC Cryptoassets Manual  which includes specific sections on DeFi and staking.

Common DeFi Activities and Their Tax Treatment

Let’s break down the most common DeFi use cases and how they’re taxed by HMRC.

1. Staking (Proof-of-Stake Rewards)

Tax treatment:

• Staking rewards are usually treated as income when received
• Income must be declared at the fair market value (FMV) in GBP at the time of receipt
• Any future gain or loss when disposing of those tokens is subject to Capital Gains Tax (CGT)

Example:
You earn 1 ETH from staking. On the day received, ETH is worth £1,500.

• Report £1,500 as income
• When you later sell or swap the ETH, calculate CGT based on any gain/loss from the £1,500 baseline

2. Yield Farming

Yield farming often involves more complex transactions across multiple protocols. HMRC applies similar principles:

• Rewards from yield farming are generally income
• Any movement or swapping of tokens may trigger a CGT event

Tip: Keep detailed records of each transaction, as multiple gas fees, liquidity moves, and token conversions are involved.

3. Liquidity Pools

Joining a liquidity pool is often treated as a disposal, because you’re exchanging your tokens for LP (Liquidity Provider) tokens.

Tax implications:

• CGT event when you add assets to the pool
• Income tax on any rewards received in tokens
• Another CGT event when you remove your assets or swap LP tokens

Complexity warning:
Some DeFi protocols allow “impermanent loss” or dynamic rebalancing, which can affect your tax calculation. You may end up receiving different tokens than those you originally deposited  which HMRC treats as separate disposals.

4. Lending and Borrowing

Lending platforms like Aave or Compound involve two key tax events:

• Lending tokens can count as a disposal (CGT) if you lose beneficial ownership
• Interest earned is treated as income

Borrowing is generally not taxed (you don’t pay tax on loans), but using crypto as collateral can trigger a CGT event if the asset is locked in a smart contract and control is relinquished.

5. Token Swaps and Disposals

Every time you:

• Swap one token for another
• Sell crypto for fiat
• Use crypto to pay for goods/services

…it’s a disposal for CGT purposes.

You’ll need to calculate:

• Gain or loss = (Value at disposal – Acquisition cost)
• Deduct any allowable expenses (e.g. transaction fees)

Example:
You bought 2 ETH for £2,000 and later swapped it for tokens worth £2,500.
You made a £500 gain which is taxable under CGT rules.

6. Airdrops

Airdrops are treated differently depending on how they’re received:

• If received without doing anything in return (e.g. as a random gift), they may not be income, but are taxed as capital when sold
• If received in exchange for action (e.g. promoting or holding tokens), they’re treated as income at FMV

Tax-Free DeFi?

In the UK, very few DeFi actions are tax-free. However, some instances where you may not be taxed:

• Buying and holding crypto (no tax until disposal)
• Transferring between wallets you own (no disposal)
• Gifting crypto to a spouse (CGT-free)