New Tax Rules for Crypto Lending: HMRC Changes to DeFi Explained

New Tax Rules for Crypto Lending: HMRC Changes to DeFi Explained

The new tax rules for crypto lending could significantly change how UK investors are taxed when lending, borrowing or providing liquidity through DeFi.

From 6 April 2027, qualifying transactions are expected to benefit from new Capital Gains Tax treatment designed to prevent tax charges arising simply because crypto is transferred as part of qualifying lending or DeFi arrangements.

HMRC has published draft legislation introducing new Capital Gains Tax rules for crypto lending, borrowing and DeFi liquidity pools. The changes are intended to take effect from 6 April 2027 and could affect around 700,000 individuals.

Under the existing rules, simply lending cryptocurrency or adding tokens to certain liquidity pools can potentially trigger a disposal for Capital Gains Tax (CGT), even though you haven’t actually sold your investment.

These new proposals are designed to change this type of anomaly.

Instead, qualifying transactions will generally benefit from no gain, no loss treatment, effectively deferring CGT until there is a genuine economic disposal.

In this guide, we explain why the rules are changing, how the new tax rules for crypto lending are expected to work and what they could mean for UK crypto investors.

New tax rules for crypto lending: key points

Why is HMRC changing the crypto lending tax rules?

The issue stems from the way traditional Capital Gains Tax principles apply to crypto For CGT purposes. It isn’t necessarily relevant that you regard a transaction as simply “lending” your crypto.

The key point under the existing rules can be whether beneficial ownership of the crypto has changed.

If beneficial ownership passes to another party, HMRC can potentially regard this as a disposal of the original crypto.

This can result in a taxable capital gain even though:

The growth and widespread adoption of decentralised finance has made this issue increasingly problematic.

In fact, we discussed this issue several years ago in our guide to the tax treatment of crypto DeFi platforms.

Therefore it is reassuring that HMRC has subsequently acknowledged that applying the existing rules can create disproportionate administrative burdens.

Following consultations with the crypto industry and tax professionals, the government has therefore decided to introduce specific legislation dealing with these arrangements.

What are the new tax rules for crypto lending?

The draft legislation creates specific Capital Gains Tax rules covering three main types of crypto arrangement:

The underlying principle is relatively straightforward.

HMRC's preference is that gains and losses should arise when an investor makes an economic disposal of their crypto, rather than simply because ownership has technically changed while participating in a qualifying lending or DeFi arrangement.

HMRC describes the purpose of the legislation as aligning the tax treatment more closely with the economics of these transactions.

The detailed provisions can be found in HMRC’s draft legislation.

Crypto lending under the existing rules

Let’s look at why the proposed changes are important.

Example: CGT on lending ETH under the existing rules

Under the existing rules, if beneficial ownership passes when you lend the ETH, this could potentially constitute a disposal for Capital Gains Tax purposes.

The problem is obvious

You haven’t sold your ETH and haven’t received £30,000. You’ve simply entered into a lending arrangement under which you expect equivalent ETH to eventually be returned.

Nevertheless, you could potentially have created a CGT liability. This is one of the issues the new legislation is intended to address.

How will the new tax rules for crypto lending work?

Where a crypto lending arrangement meets the relevant conditions, certain disposals will instead take place on a no gain, no loss basis.

Using our previous example, lending the 10 ETH would therefore not automatically crystallise the £15,000 gain simply because the ETH had been transferred into a qualifying lending arrangement.

Instead, the underlying capital gain does not crystallise on this transaction.

The intention is that tax should generally arise when there is a genuine economic disposal rather than simply because crypto has been transferred as part of the lending arrangement.
This should make the tax treatment of crypto lending more aligned with conventional lending arrangements.

What does no gain, no loss mean for crypto lending?

Importantly, no gain, no loss does not mean tax-free.

Instead, the transaction is treated as taking place at a value that creates neither a capital gain nor a capital loss.

The underlying capital gain hasn’t disappeared.

It is effectively deferred until the point at which the investor eventually makes an economic disposal.

For example, if you ultimately sell your crypto for pounds sterling, CGT may still be due in the normal way.

The new rules should therefore be regarded as CGT deferral rules rather than a CGT exemption.

What transactions are regarded as a qualifying crypto lending arrangement?

Not every transaction described by a platform as “lending” will automatically qualify for this treatment.

The draft legislation introduces the concept of a Single Cryptoasset Lending Arrangement.

Broadly speaking, this involves qualifying crypto of a particular type being made available for use under an arrangement where the investor acquires rights to receive eligible crypto together with a return.

Crucially, the overall arrangement must be economically equivalent to a lending transaction.

Therefore the precise legal structure of the transaction continues to determine the potential tax treatment.

However, the way in which a crypto exchange or DeFi platform describes a transaction doesn’t necessarily determine its UK tax treatment.

What about borrowing crypto?

These proposals aren't confined purely to crypto lending arrangements.

HMRC is also introducing specific rules for Single Cryptoasset Borrowing Arrangements.

Broadly speaking, these cover arrangements where a lender transfers qualifying crypto to a borrower, otherwise than by sale, and the borrower is required to return that crypto or crypto of the same type.

There are also provisions dealing with collateral.

Under these proposals, the borrower will generally be treated as acquiring the borrowed crypto for its market value at the time it is borrowed.

When crypto of the same type is subsequently transferred back to satisfy the borrowing obligation, the borrower is broadly treated as disposing of it for an amount equal to that original value.

The legislation therefore creates a specific legal framework for transactions which could otherwise be difficult to analyse using conventional tax principles.

What happens to crypto used as collateral?

This is another potentially important change being introduced by these proposals.

Under HMRC’s existing interpretation, providing crypto as collateral can potentially constitute a disposal if beneficial ownership of the crypto passes.

We highlighted this issue in our original guide to the tax treatment of DeFi platforms.

Under the new proposed borrowing rules, however, crypto provided as collateral as part of a qualifying borrowing arrangement can effectively be disregarded for CGT purposes.

This should remove another potential CGT hurdle where, economically, the crypto is simply being used to secure borrowing.

What about DeFi liquidity pools?

The proposals also contain specific rules for liquidity pools.

HMRC calls these Automated Market Making Arrangements, or AMMs.

An automated market maker allows crypto to be traded via a liquidity pool rather than relying on a traditional buyer and seller being matched through an exchange.

Under these arrangements, investors provide crypto to the pool and can receive a return for providing that liquidity.

The tax issue is that transferring crypto into a liquidity pool can potentially result in a disposal under existing CGT rules. The new legislation aims to change this treatment for qualifying arrangements.

Which liquidity pools will qualify?

HMRC’s definition of an Automated Market Making Arrangement is quite specific. However, broadly speaking, the arrangement must:

The widely available condition broadly requires a substantial number of independent people to be able to participate in the arrangement and trade the crypto through the smart contract.

Therefore, not every private or bespoke crypto arrangement will necessarily qualify.

What happens when you add crypto to a liquidity pool?

Where the relevant conditions are satisfied, qualifying transfers into an Automated Market Making Arrangement can receive no gain, no loss treatment.

For example, suppose you contribute 1 ETH + 2,000 USDC to a qualifying liquidity pool. Under existing CGT principles, transferring beneficial ownership of the crypto could potentially trigger disposals.

Under the proposed regime, the qualifying transfers can instead be made on a no gain, no loss basis.

This means simply entering the liquidity pool shouldn’t necessarily crystallise the gains already sitting within your ETH or other crypto.

What happens when you withdraw from a liquidity pool?

This is where the legislation becomes more complicated.

Where you ultimately receive the same types and quantities of crypto that you originally contributed, the proposed rules broadly allow the assets to enter and leave the arrangement without triggering a gain or loss simply because of those transfers.

However, liquidity pools do not always work this neatly. The composition of the assets you receive when you withdraw can be different from the assets you originally contributed to the liquidity pool.

Example: receiving different amounts from a liquidity pool

Suppose you contribute 1 ETH and 2,000 USDC to a liquidity pool. When you later withdraw your share, you receive 0.8 ETH and 2,500 USDC.

Your economic position has changed.

The proposed legislation contains specific rules dealing with situations where the quantity of crypto received is greater or less than the amount originally invested.

The difference can therefore result in gains or losses being realised.

Consequently, the new regime does not make liquidity pool transactions tax-free. Instead, it attempts to separate transfers that are simply part of participating in the arrangement from genuine changes in the investor’s economic position.

What cryptoassets qualify for the new rules?

The legislation also introduces the definition of a qualifying cryptoasset.

Broadly, a cryptoasset will not qualify if it is:

However, there are detailed exceptions within the definition of tokenised assets.

The legislation also gives the Treasury power to amend which crypto will qualify in future. Therefore the precise nature of the token will remain important.

Consequently, crypto investors shouldn’t simply assume that every form of crypto used within a lending or DeFi protocol automatically qualifies under the new regime.

What about stablecoins?

Stablecoins are widely used in crypto lending and liquidity pools and the government has separately proposed significant changes to the tax treatment of qualifying stablecoins from 6 April 2027.

The stablecoin and crypto lending reforms have been designed to work alongside one another. The interaction between the two regimes will therefore need to be considered where eligible stablecoins are used in lending, borrowing or liquidity pool arrangements.

We've explained the separate proposals in our guide to HMRC’s proposed changes to the tax treatment of stablecoins.

Do the new crypto lending rules apply to companies?

No, not under the proposed CGT regime, and this is an important limitation.

The draft legislation applies where a person other than a company disposes of or acquires qualifying crypto under the relevant arrangements.

Therefore the new rules are aimed principally at individuals and trustees and not companies.
In view of this, companies holding or using crypto will need to consider their Corporation Tax position separately.

When will the new crypto lending tax rules start?

The proposed commencement date is 6 April 2027.

For Single Cryptoasset Borrowing Arrangements, the legislation is intended to apply where the lender transfers qualifying crypto to the borrower on or after that date.

For the other relevant arrangements, it broadly applies to transactions occurring on or after 6 April 2027.

It is important to remember that, at the time of writing, this is draft legislation.
The proposals form part of the draft Finance Bill 2026-27 and could therefore change before becoming law.

What happens to existing crypto lending arrangements?

The draft legislation contains transitional provisions for existing arrangements. This is important because many investors may already hold interests in crypto lending or AMM arrangements when the new regime begins.

For example, where someone holds an interest in a Single Cryptoasset Lending Arrangement immediately before 6 April 2027 and the relevant statutory conditions are satisfied, the legislation can deem a disposal and immediate reacquisition at market value immediately before the new regime begins.

Any resulting gain or loss is then treated as accruing on 6 April 2027.

This is a technical area of the draft legislation and could have serious consequences for investors with existing DeFi positions.

Therefore, it will be important to review open lending and liquidity pool positions as the commencement date approaches.

Will the new rules apply retrospectively?

During the consultation process, representations were made that the new treatment should apply retrospectively.

However, investors should not assume that historic transactions will automatically qualify for the new no gain, no loss treatment.

The legislation contains commencement and transitional provisions around the introduction of the new regime from 6 April 2027. These will be particularly important for arrangements that were entered into before that date but remain open when the new rules take effect.

Until the legislation is finalised, historic transactions should continue to be considered under the tax rules that applied at the time.

How will returns from crypto lending be taxed?

The proposed rules do not make returns from crypto lending or providing liquidity tax-free.

This is an important distinction. The new regime primarily changes the Capital Gains Tax treatment of transferring crypto into and out of qualifying arrangements. It does not provide a general exemption for the returns generated by those arrangements.

Interest, rewards and other returns can therefore still have separate tax consequences. Whether a particular return is taxed as income or capital will depend on the nature of the arrangement and how the return is generated.

Similarly, the eventual sale, exchange or other disposal of the underlying cryptoassets can still give rise to Capital Gains Tax.

Will crypto tax software deal with the new rules automatically?

Hopefully, but investors should not automatically assume that crypto tax software will always get the answer right.

DeFi transactions are especially challenging for tax software because a single economic arrangement can generate numerous blockchain transactions. These might involve lending, collateral, liquidity tokens, rewards, swaps and transfers into or out of smart contracts.

Crypto tax software can only work with the information available to it and the way individual transactions have been classified.

For example, the fact that crypto leaves your wallet does not necessarily mean there has been a taxable disposal. Equally, receiving a new token does not automatically determine how the transaction should be treated for tax purposes.

This distinction could become even more important under the proposed rules, as software will need to distinguish between transfers that qualify for the new treatment and transactions that continue to represent genuine economic disposals.

Complex lending and DeFi transactions should therefore be reviewed carefully rather than simply accepting the figures generated by crypto tax software.

We discuss some of the other common problems investors and businesses should watch for in our guide to crypto tax mistakes to avoid.

What should crypto investors do now?

The new regime is not expected to take effect until 6 April 2027, so the existing tax rules remain relevant in the meantime.

If you participate in crypto lending, borrowing or liquidity pools, you should continue keeping detailed records of your transactions, including:

Maintaining accurate records is particularly important with DeFi because the tax treatment may depend on what actually happened within the arrangement rather than simply what appears in a wallet transaction history.

This information may also become important when applying the transitional provisions as the new regime takes effect.

What do the new crypto lending tax rules mean for investors?

On balance, the proposals appear to be good news for many UK crypto investors.

The existing tax treatment of DeFi lending and liquidity provision can produce Capital Gains Tax consequences that do not always reflect the investor's underlying economic position. The proposed rules are intended to address this by moving the CGT charge away from certain technical transfers of ownership and towards genuine economic disposals.

For investors carrying out significant amounts of DeFi activity, this could simplify their Capital Gains Tax calculations considerably and remove some of the more counterintuitive consequences of the existing rules.

However, the new regime is not a blanket tax exemption for crypto lending or DeFi. The qualifying conditions will still need to be considered, lending returns and rewards may remain taxable, and genuine disposals can still produce capital gains or losses.

The key change is therefore not that DeFi becomes tax-free, but that the tax treatment should more closely reflect what has happened economically.

For investors with substantial or complex DeFi activity, getting the underlying transaction history and tax treatment right will remain important.

Need help with crypto lending and DeFi crypto tax?

Crypto lending, borrowing and liquidity pools can create some of the most complicated transactions we see when preparing crypto tax calculations.

At The Friendly Accountants, we’ve specialised in crypto taxes since 2016 and have been writing about the UK tax treatment of DeFi since long before these proposed reforms were announced.

We help investors and crypto businesses understand complex transaction histories, review crypto tax software reports and correctly report their crypto activity to HMRC.

You can find more information about how we help on our Crypto & Web3 accountants page.

You can also explore our other crypto tax guides and resources for further information on the UK tax treatment of crypto.

If you’d like to discuss your crypto lending, DeFi or wider crypto tax position, feel free to call us on 01202 048696 or email us at [email protected].

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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