The UK's tax authority HMRC has released a draft proposing to adjust DeFi taxation using the NGNL (No Gain, No Loss) model, excluding immediate taxation on operations such as lending and liquidity provision, and only declaring when actual gains or losses are realized. This aims to reduce administrative burdens and make the tax system more aligned with decentralized finance practices.
The reform direction of DeFi tax pain points
The UK HM Revenue and Customs (HMRC) recently released a policy draft proposing reforms for the taxation of crypto assets in DeFi. The current rules treat deposits into lending protocols or the provision of liquidity as “disposals,” triggering capital gains tax. The new proposal introduces the NGNL (No Gain, No Loss) principle, which only taxes when there is an actual price difference upon asset realization. This adjustment aims to align with the essence of the DeFi economy and reduce unnecessary tax burdens on users.
Tax exemption for lending and AMM operations
If the draft is approved, DeFi users can be exempt from immediate taxation in the following scenarios:
- Deposit assets into the lending platform;
- Provide liquidity for AMM (Automated Market Maker);
- Participate in multi-token combination protocols.
In the NGNL model, if there is no price difference when retrieving assets, it is considered a zero tax base; only the profit and loss difference needs to be declared. This will significantly simplify the tax handling of common operations.
Purpose of Tax Reform and Industry Feedback
HMRC’s goal is to alleviate the administrative burden caused by existing rules and to ensure that the tax system reflects the complex architecture of Decentralized Finance. The draft has received 32 responses from entities such as Aave, Binance, Deloitte, and CryptoUK, with most supporting NGNL, citing reasons including the reduction of unnecessary disposition events and lowering the difficulty of reporting. The new rules apply to multi-token protocols but exclude RWA (tokenized real-world assets) and traditional securities.
Remaining challenges and execution considerations
NGNL has reduced burdens, but the DeFi tax environment still poses challenges. For example: purchasing ETH, converting WETH, and finally cashing out are still subject to taxation. HMRC plans to collaborate with software developers to optimize reporting tools and continue dialogues with the industry to refine regulations. The legislative timeline is not yet determined.
Summary
The UK’s HMRC’s NGNL proposal symbolizes the modernization of the DeFi tax system. It not only exempts deposits from immediate taxation but also enhances transparency and user-friendliness. If formally legislated, it will inject new vitality into the UK’s crypto ecosystem, attracting more DeFi participants and businesses.
* The information is not intended to be and does not constitute financial advice or any other recommendation of any sort offered or endorsed by Gate.
