The UK's HM Revenue and Customs is consulting on whether to exempt deposits into decentralized finance protocols and liquidity pools from capital gains tax at entry, according to tax guidance materials circulating among crypto compliance professionals.
The proposal would defer CGT recognition until a user exits a position or realizes yield, rather than treating the initial deposit as a taxable event. HMRC has not yet finalized the rules; the consultation remains open and no effective date has been confirmed.
UK tax law currently treats crypto-asset transactions as potentially taxable disposals. When a user deposits tokens into a liquidity pool or a lending protocol, the question of whether that deposit constitutes a "disposal" for CGT purposes has created friction in the retail participation in on-chain finance. A deferral model would align the UK approach with tax treatment in some other jurisdictions, where entry into yield-bearing positions does not trigger an immediate tax event.
According to tax advisory materials published by law firm Freshfields Bruckhaus Deringer, HMRC proposed a "no-gain/no-loss" framework for DeFi activity as part of its broader review of cryptoasset taxation. The framework would allow users to enter LP positions and lending arrangements without immediate CGT on the deposit itself, with recognition deferred to exit or yield realization.
The consultation does not yet carry the force of law. HMRC has been reviewing crypto taxation rules since 2023, with prior guidance stating that yield-farming income is taxable as it accrues. A finalized rule change would require formal amendment to tax law or binding official guidance, neither of which has been published.
The timing and scope of HMRC's decision remain unclear. The authority has not announced a consultation closure date or timeline for final guidance.
