The UK launches new tax policy for DeFi: "No gain, no loss" principle becomes a major breakthrough in the industry.

The UK’s HM Revenue and Customs (HMRC) recently officially proposed a “No Gain, No Loss” tax framework for Decentralized Finance (DeFi), which has gained support from 32 industry giants including Aave. The new regulation will change the current taxation method that treats DeFi deposits as asset disposals, with Capital Gains Tax being deferred until actual economic disposal occurs. This reform is expected to eliminate tax uncertainties for users participating in Liquidity Mining and lending protocols, and is viewed as an important milestone in the global regulatory evolution of digital assets.

Core of Policy Change: From “Deposits Are Taxable” to Economic Substance Taxation

The current UK tax system treats the deposit of funds by DeFi users into the protocol as a disposition of assets, even if these operations only involve collateralization or lending purposes. This taxation logic is fundamentally in conflict with the actual operation model of the DeFi ecosystem - users do not really give up ownership of assets when providing liquidity, but only temporarily transfer the right to use them. HMRC's “no gain, no loss” principle is a rational return to this type of economic substance.

Specifically, under the new framework, capital gains tax will no longer be triggered at the deposit node when users deposit crypto to a lending protocol or provide liquidity to an automated market maker (AMM). Instead, the tax obligation will be deferred until the user finally sells or trades the asset and realizes the gain or loss. This change significantly reduces the compliance complexity of participating in DeFi, giving users more freedom to explore a variety of yield farming strategies.

It is important to note that the same policy applies to complex multi-token arrangements in decentralized protocols. When the user withdraws more tokens than the deposited amount, the excess amount will be taxed; Conversely, if the amount withdrawn is less than the initial deposit, the difference can be considered a loss. This design ensures that the tax is matched with the real economic benefits, and avoids the unreasonable phenomenon of “unrealized gains need to be taxed” under the current system.

Core Terms of the UK's New DeFi Tax Policy

• Taxation Node: from asset deposit latency to actual disposal
• Scope of application: Liquidity Mining, Lending Protocols, and Multi-Token Pools
• Excludes: Tokenized physical assets vs. traditional securities
• Collection and management requirements: high-frequency trading still needs to be declared, and software support needs to be improved
• Legal Status: During the consultation phase, 32 institutions have submitted formal feedback

Industry response and policy optimization space

Major players in the DeFi space spoke highly of the proposals. Aave CEO Stani Kulechov hailed the move on social media platform X as a “major win for DeFi users in the UK” and expressed full support for this industry-specific approach to regulation. A number of organisations, including Binance, Deloitte and CryptoUK, submitted constructive comments during the consultation process, with a majority of respondents supporting the move to the NGNL model, believing that it would effectively reduce the administrative burden.

However, there is still room for optimization in the policy details. Some professionals warn that adopting alternative models (such as treating each token movement as a taxable event) could significantly raise the understanding threshold for retail users. Other experts emphasize the necessity of clear definitions and the importance of maintaining coordination with how other jurisdictions handle digital assets. These suggestions reflect the dual demand of the industry for regulatory certainty while also wishing to maintain consistency in international operations.

It is worth noting that even under the new regulations, the full process for UK users to participate in DeFi still involves multiple taxable events. From purchasing Ethereum (currently priced at about $3,010.79), converting it to WETH, to finally liquidating the profits from DeFi activities, these nodes will still incur tax reporting obligations. Additionally, the policy explicitly excludes tokenized physical assets and traditional securities, maintaining a regulatory focus on native DeFi tokens.

Landing Challenges and Tax Administration Innovations

Despite the recognition of the policy direction, there are still significant challenges at the implementation level. The most prominent of these is the reporting burden for high-frequency trading users— even with the application of the NGNL principle, users still need to record a large number of transaction records, which poses a significant obstacle for ordinary investors lacking professional tracking tools. HMRC has revealed that it is working with software vendors to assess this issue, suggesting that official record-keeping tools or simplified reporting processes may be introduced in the future.

From a technical implementation perspective, the on-chain transparency of DeFi protocols actually provides a unique advantage for tax administration. All transaction records are publicly accessible, and with the appropriate analytical tools, accurate identification of taxable events can be achieved. Some tax technology startups have begun developing automated tax calculation systems specifically targeting DeFi activities, and these innovations are expected to alleviate users' compliance pressure.

Regulators also face the challenge of defining boundaries. Accurately distinguishing between “qualified crypto assets” and “traditional security tokens” will be key to implementing policies. Given that certain tokens may possess both characteristics, HMRC needs to provide more detailed classification guidance. The current proposal suggests referencing existing financial regulatory frameworks, but this may prove to be insufficiently flexible in the rapidly evolving DeFi space.

Global Regulatory Game and Market Impact

The UK's move is landmark in the global competition for cryptoasset regulation. While the US Securities and Exchange Commission (SEC) is still regulating the market through enforcement actions, the UK has chosen to embrace innovation through tax reform. This discrepancy could affect the regional distribution of DeFi projects and talent in the future, prompting more protocols to consider the UK as a friendly jurisdiction.

From the perspective of market structure, tax certainty is crucial for institutional capital entry. One of the biggest concerns for traditional financial institutions when participating in Decentralized Finance is the unclear tax treatment. The new framework in the UK provides institutional investors with a predictable tax environment, which may accelerate the entry of traditional capital into the DeFi ecosystem through compliant channels. London’s status as a global financial center may be further solidified due to such forward-looking policies.

Comparative analysis shows that countries that are more friendly to crypto assets, such as Singapore and Switzerland, have yet to issue tax guidelines specifically for DeFi. The UK's first-mover stance is likely to push the world's major economies to reassess their digital asset tax policies, creating a virtuous cycle of regulatory harmonization. In particular, in the context of the OECD's publication of the Reporting Framework for Crypto Assets (CARF), the consistency of international tax standards is crucial.

Policy Evolution Prospects and Industry Insights

HMRC has not provided a legislative timetable but has committed to ongoing communication with the industry. Given the upcoming general election in the UK, the legislative process for this proposal may be influenced by political factors. However, the bipartisan support for the development of fintech provides an optimistic basis for the continuity of policies. The industry expects that the final rules may be formally established in the fiscal budget for 2025.

For DeFi users, it is still necessary to fulfill tax obligations according to the current system before the new regulations take effect. Professional tax advisors recommend that users keep complete records of all on-chain activities, including deposit times, amounts, and protocol types, to facilitate future tax declarations or refund applications. Meanwhile, participation in testnet activities or operations such as governance voting that do not involve economic value transfers may continue to enjoy tax exemptions.

From a broader perspective, the UK DeFi tax reform represents an important shift in regulatory thinking: from trying to rigidly apply traditional frameworks to building new rules based on the nature of blockchain business. If successfully implemented, this approach will not only provide a model for other countries, but also accelerate the evolution of DeFi from edge innovation to mainstream financial infrastructure, and ultimately promote the true realization of the inclusive value of open finance.