The UK’s tax authorities, His Majesty’s Revenue and Customs (HMRC), have introduced the “no gains, no loss” (NGNL) rule to change the tax system in decentralized finance (DeFi).
Called “Tax treatment of cryptoasset loans and liquidity pools,” the law overhauls heavily criticized the 2022 “dry tax” model, which caused tax credits and any transfers.
There is no tax on crypto capital gains until you sell them
From April 6, 2027, the new model will suspend Capital Gains Tax (CGT) for approximately 700,000 DeFi users. Here is a breakdown of the main features of frame:
First, the NGNL rules will apply to crypto assets that are invested in interest-bearing transactions, investment pools, or as collateral.
Secondly, HMRC will classify flexible signals using smart contracts as a “tax-free” event. A taxable event will only occur if there is a “financial loss”. This means selling crypto assets on exchanges, swapping other assets, or withdrawing more assets than what was invested in the investment pool.
Third, the funding agency considers any harvest, mining returns, airdrops, interest, rewards, even service fees as other income. This will make them subject to Income Tax of up to 45% in the year they are received.
Finally, the law will include strict tracking of crypto transactions to eliminate tax disputes. In November 2023, the UK committed to join the Organization for Economic Co-operation and Development (OECD) framework called CARF (Crypto-Asset Reporting Framework). From 2027, HMRC will look to historical data from crypto platforms to determine which assets are eligible for NGNL transfer.
Thoughts
Compared to the previous example, the new guidelines are more complex, reducing the major documents for both DeFi users and tax authorities. He has also been associated with the Financial Conduct Authority (FCA) for many years purpose about positioning the UK as a competitive global crypto hub.
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