Finally Tax Fairness In a significant step for digital-asset regulation His Majesty’s Revenue and Customs (HMRC) the UK’s tax authority responsible for collecting taxes and defining how financial assets are treated under law has proposed a major shift in the taxation of decentralised finance (DeFi) activity. In the latest update to HMRC’s ongoing DeFi tax review a “no gain no loss” approach has been outlined for DeFi lending staking and liquidity-pool deposits. If adopted this means that simply depositing tokens into protocols such as Aave Compound Lido or Uniswap would no longer count as taxable disposal. Only actual economic gains such as selling or swapping tokens would trigger a capital gains event. For many DeFi users this marks the end of what the industry has long called a “dry tax”. Under previous rules users could owe tax despite never realising a profit. Understanding the Shift Under the UK’s current rules moving tokens into a smart contract can be treated as giving up control of an asset and receiving a new one in return. This interpretation often misaligns with how DeFi works in practice. Most users deposit tokens to earn interest borrow against them or supply liquidity and later withdraw the same asset. HMRC acknowledges this mismatch. The consultation outcome proposes that deposits and withdrawals in DeFi protocols should be treated similarly to moving funds between two personal accounts. No tax should arise until the user makes an actual sale or disposal that leads to a real economic gain. The proposal covers single-token lending crypto-backed borrowing and automated market-maker pools. Rewards and yields such as staking returns or interest would continue to be taxed as income at the moment they are earned. This brings tax treatment closer to real-world behaviour rather than the mechanical interpretation of smart-contract steps. Industry Response: Relief and Cautious Optimism The reaction across the ecosystem has been largely positive. Aave founder Stani Kulechov called the shift “a major win for U.K. DeFi users” reflecting the long-standing concern that taxing deposits was discouraging everyday use of decentralised applications. During the consultation HMRC received 32 formal submissions from exchanges DeFi teams tax specialists and industry groups. Most supported the “no gain no loss” approach because the previous model created unnecessary complexity for users and unworkable accounting standards for companies. This view is shared by participants outside the lending and staking sector as well. Sudeep Chatterjee CEO of STOEX notes that clear tax rules are essential for institutional adoption. “Predictable treatment of deposits matters more than the tax rate itself; uncertainty is the real deterrent. Clear guidance is what finally unlocks participation in tokenized markets by large asset managers” he explains. The UK’s evolving approach also stands out globally. While the United States continues to debate whether staking rewards should be taxed at the moment they are created or when they are sold HMRC takes a pragmatic stance. The focus is to tax actual economic gain rather than the technical steps inside a smart contract. Why This Matters Beyond the UK The move is part of a broader trend in the UK’s digital-asset policy. Over the past two years regulators have steadily shifted from broad exploratory frameworks to more operational clarity. Earlier reforms focused on consumer protection exchange registration and stablecoin regulation. The DeFi tax proposal continues in this direction by addressing day-to-day user activity rather than edge-case events. For global builders and founders the signal is clear. The UK wants to position itself as a competitive home for DeFi development. Removing “dry tax” risk lowers friction for users and makes it easier for companies to design compliant services. It also shows that regulators are willing to adjust rules after engaging with industry feedback rather than holding rigid interpretations. Tapan Sangal Chief Visionary at Kwala sees the decision as part of a growing recognition that technical actions inside smart contracts should not be treated as real-world disposals. “Tax systems have always been built around economic outcomes and most movements inside a smart contract are technical plumbing not real disposals” he says. “Tax should continue to follow economic outcomes not code-level mechanics and HMRC’s shift acknowledges that reality” he notes. His view aligns with a broader theme emerging across regulatory circles. Tax authorities are becoming just as important as securities regulators in shaping DeFi’s future. What Comes Next Although the proposal has been welcomed HMRC has clarified that this is still a potential framework and not a final law. Further consultation and technical drafting will determine how the rules operate in practice. Reporting requirements are also expected to become stricter as the UK begins implementing the global Crypto-Asset Reporting Framework in 2026. Users must still maintain detailed records of deposits rewards and disposals. DeFi protocols serving UK users may also face new obligations to support traceable reporting. Even with these caveats the direction is notable. By grounding tax rules in economic substance rather than smart-contract mechanics the UK positions itself as a jurisdiction willing to evolve with the technology rather than force the technology to adapt to outdated rules.