UK Treasury relaxes DeFi tax rules to boost innovation and transparency

The United Kingdom has taken a decisive step to remove a longstanding tax obstacle for participants in decentralized finance, as HM Revenue and Customs (HMRC) implements a new tax framework that effectively ends the so-called “dry tax” on DeFi lending and staking activities from December 2025. The change, the culmination of a multi‑year consultation exercise, reframes how transfers into DeFi protocols are treated for tax purposes and is likely to reshape incentives for investors, businesses and developers in the UK’s nascent DeFi market.

Under the revised approach, HMRC will generally not treat the mere transfer of cryptoassets into a lending or staking protocol as a disposal for Capital Gains Tax (CGT) purposes provided specified conditions are met. Instead, tax will typically arise on the receipt of rewards, interest or yield , which will be treated as income and taxed under Income Tax or Corporation Tax depending on the taxpayer’s status , and on any later genuine economic disposal of the underlying asset. HMRC’s consultation document framed the change as an attempt to align tax treatment with the “underlying economic substance” of DeFi arrangements and to reduce the administrative burden on users.

Industry groups and market participants welcomed the clarification. Stani Kulechov, founder of Aave, praised the rules as a potential catalyst for growth, saying the clarification could “trigger a crypto boom,” according to reporting by Yahoo Finance. UK Finance likewise urged alignment and consistency across regulatory approaches in its formal response to HMRC’s consultation, saying a clear and coherent tax framework is essential to support innovation in DeFi.

The policy shift reflects the government’s stated ambition to make the UK a competitive jurisdiction for Web3 and digital assets. According to reporting by CoinDesk, the government’s November 2025 proposal adopting a “no gain, no loss” rule for DeFi deposits , deferring CGT until a true economic disposal , underpinned the final guidance and drew support from major industry players. HMRC’s stance also clarifies the tax treatment of collateralised lending and recognises that many DeFi arrangements leave the original owner with an underlying beneficial interest even where legal ownership mechanics differ for protocol functionality.

While the removal of the dry tax addresses a major barrier to participation, it comes alongside measures intended to strengthen tax compliance. Government guidance and industry reporting note that from 1 January 2026 UK crypto-exchanges will be required to collect detailed transaction data to support HMRC’s cross‑checking of tax returns, in line with the OECD’s Crypto‑Asset Reporting Framework. CoinDesk reports that new data‑collection requirements and the prospect of sanctions for non‑compliance signal a concurrent push to prevent tax avoidance as the market expands.

The policy package therefore balances facilitation with enforcement: simplifying CGT treatment for routine DeFi activity while increasing information flows to HMRC. That duality was evident in industry commentary during the consultation process, and in a press statement from Global Digital Finance that welcomed HMRC’s manual updates while stressing the need for clarity given the diversity of DeFi operating models.

Practical effects for market participants are straightforward but consequential. Individuals and institutions that previously faced potential CGT bills on deposits into lending or staking protocols should see that risk removed where the new conditions apply, easing cash‑flow and compliance pressures. Income from yields will remain taxable as income, and capital gains will crystallise only on non‑DeFi disposals. Firms building or promoting DeFi services in the UK can point to greater tax predictability when structuring products and advising customers.

The UK’s approach may also influence other jurisdictions wrestling with similar issues. Observers have suggested that HMRC’s detailed, economically grounded framework could provide a template for countries seeking to reconcile traditional tax principles with decentralised finance, though different tax systems and regulatory priorities mean replication is not automatic.

Despite broad approval from parts of the industry, the reforms are not without caveats. The final rules depend on specific conditions and reporting requirements that market participants must follow to obtain the intended tax outcomes. HMRC’s guidance and associated reporting rules , including the new exchange reporting regime from January 2026 , will become central to how compliance is managed in practice.

By removing the “dry tax” and clarifying when income and capital events occur, the UK has reduced a major point of friction for DeFi activity. The change, enacted in December 2025 following consultation, offers both an invitation to market entrants and a reminder that heightened transparency and enforcement will accompany any expansion of the sector. As the rules are put into practice, industry groups, exchanges and HMRC will play key roles in ensuring the new framework promotes growth while maintaining tax integrity.