Key points
- Aave founder, Stani Kulichov, praised the UK’s new tax policy regarding crypto lending and liquidity pools.
- On July 13, HMRC introduced a “no profit, no loss” (NGNL) rule for crypto lending and liquidity pools, meaning that deposits in protocols like Aave will no longer trigger immediate capital gains tax.
- The new tax policy is a major achievement for UK cryptocurrency users as it makes lending and liquidity pools more tax-friendly for ordinary users.
On July 13, the founder of Aave, Stani Kuleshov, the largest lending protocol, publicly expressed his excitement about the new UK tax legislation for crypto lending and liquidity pools (LPs).
“UK HMRC is adopting new tax legislation relating to crypto lending and liquidity pools,” Kuleshov stated.
Aave founder says UK tax policy on cryptocurrencies is moving in the right direction
The main change is that depositing funds into lending protocols will now be treated as “neither profit nor loss” for tax purposes. This means that users will not owe capital gains tax until they sell, withdraw, or dispose of the asset in a way that makes a profit. The Aave founder also clarified that the collateral backing these deposits will not be subject to capital gains tax either.
Aave founder Kulechov described the new development by UK regulators as the “right direction” for the cryptocurrency sector and said industry feedback helped demonstrate that other options would have been too complicated for taxpayers. “Positive about HMRC’s approach because 1) it proves that the industry can impact the bottom line (similar to what we did with the £20,000 stablecoin holding cap) and 2) seeing more tax legislation around DeFi means the field has progressed in a meaningful way,” the post on X said.
The new UK policy introduces a “no profit, no loss” model for cryptocurrency lending
This policy comes from HMRC (His Majesty’s Revenue and Customs) consultation on how taxes are levied Decentralized finance (DeFi) Activities that involve lending and staking crypto assets. The official document gave strong support for the “no profit, no loss” model.
Under previous UK tax rules, depositing cryptocurrencies into lending protocols or liquidity pools could be considered a taxable event. This has resulted in capital gains tax being imposed even if the consumer does not sell the asset. This policy created “dry” tax levies, tax bills without any actual cash gain. This leads to complex tracking and reporting problems.
The proposed NGNL treatment changes this;
- The new tax policy will consider deposits in lending protocols or certain liquidity arrangements as tax neutral.
- Capital gains tax is deferred until the user performs an “economic act,” such as an actual sale or exchange that creates value.
- Collateral in borrowing arrangements are generally not subject to capital gains tax during the life of the loan.
The new tax policy is expected to show the reality of these transactions as it applies to both DeFi and some centralized finance settings. HMRC is making new amendments to existing policies after obtaining input from stakeholders, with the inclusion of Automated Market Maker (AMM) and other popular DeFi activities.
the Official document He stated that “HMRC published a call for evidence which was open from 5 July 2022 to 31 August 2022 seeking views on the taxation of crypto asset loans and liquidity pools. This was followed by a consultation that ran from 27 April 2023 to 22 June 2023. Since the consultation, HMRC has continued to engage with stakeholders on the design of the rules.
According to the official announcement, this measure will come into effect as of April 6, 2027.
The policy is expected to boost the adoption of DeFi in the UK by removing direct tax hurdles, and will reduce legal ambiguity around cryptocurrency regulations for users and institutions. This will directly benefit lending platforms like Aave. Kulichov stated:This is the right direction, driven mainly by industry feedback that any other approach would cause a significant administrative burden on taxpayers.“
(source: DeFiLlama)
The global DeFi lending sector is one of the most active decentralized finance (DeFi) sectors. As of now, the total value of all lending protocols is currently around $38 billion, according to DeFiLlama. Aave tops the list of lending protocols with over $13.30 billion TVL.
Amid increasing regulatory clarity around the cryptocurrency sector around the world, e.g The law of clarityThe DeFi sector is witnessing increasing adoption, as it enhances investor confidence.
