UK DeFi Tax Guide 2025

HMRC Treatment of DeFi

HMRC's CRYPTO manual (CRYPTO22000-23000) provides guidance:

• DeFi transactions follow same rules as centralized crypto
• Cryptoassets = property for tax purposes
• Token swaps = disposal triggering CGT
• Rewards may be income or capital gains

Yield Farming & Liquidity Mining

Tax Treatment of Rewards

HMRC hasn't issued specific DeFi guidance, but likely treatment:

Option 1: Income Tax (HMRC's likely view for regular activity)

• Rewards = miscellaneous income
• Taxed at 20-45% (income tax rates)
• Must report on Self Assessment if over £1,000 trading allowance
• May trigger Class 2/4 NI if considered trading

Option 2: Capital Gains (if tokens appreciated from £0 base)

• Tokens received for free = £0 cost basis
• Full sale proceeds = capital gain
• 10-20% CGT rates (lower than income tax)
• £3,000 annual exemption applies

⚠️ Note: HMRC may argue income tax applies for regular/systematic DeFi farming. Consult a UK crypto accountant for your specific situation.

Example: Yield Farming (Income Treatment)

• April 2024: Provide liquidity to Uniswap pool
• October 2024: Claim 50 UNI tokens worth £600
• Income: £600 (report on Self Assessment)
• Cost basis: £600 (for Section 104 pool)
• March 2025: Sell for £900
• Capital gain: £300

Example: Yield Farming (CGT Treatment)

• Claim 50 UNI tokens worth £600
• Cost basis: £0 (received for free)
• Sell for £900
• Capital gain: £900

Providing Liquidity

Adding Liquidity

Not a disposal if you receive LP tokens:

• LP tokens represent beneficial ownership
• No CGT event when depositing
• Maintain cost basis of underlying tokens

Removing Liquidity

CGT event if token amounts differ:

• Calculate gain/loss on each token
• Use Section 104 pool for cost basis
• Apply same-day and 30-day rules

Impermanent Loss

Not deductible until realized:

• While in pool: no tax impact
• When withdrawn: realized loss is allowable

Example: Liquidity Pool

• Deposit: 1 ETH (£2,000) + 2,000 USDC (£1,600)
• Receive: 100 LP tokens
• CGT: £0 (not a disposal)
• 8 months later, withdraw: 0.9 ETH (£2,700) + 2,100 USDC (£1,680)
• ETH: Cost £2,000, received £2,700 = £700 gain
• USDC: Cost £1,600, received £1,680 = £80 gain
• Total: £780 capital gain

Lending & Borrowing

Lending Crypto

Interest = likely income tax:

• Report on Self Assessment
• FMV of tokens = income
• Cost basis = income value

Borrowing Crypto

Taking loan = not taxable:

• Loans aren't income
• Depositing collateral = not a disposal
• Interest paid = not deductible (unless business)

Liquidations

Forced liquidation = disposal for CGT:

• Calculate gain/loss on collateral seized
• Report on Self Assessment

Example: Lending on Aave

• Lend 10,000 USDC (cost: £8,000)
• Earn 5% APY = 500 USDC (£400)
• Income: £400
• Cost basis for interest: £400

Token Swaps

Every swap = CGT disposal + acquisition:

• Disposing of token A = CGT event
• Acquiring token B = new Section 104 pool entry
• Same-day rule applies if multiple swaps
• 30-day rule (bed and breakfasting)

Example: Uniswap Swap

• Buy 1 ETH for £2,000
• Swap for 2,000 DAI when ETH = £3,000
• Disposal proceeds: £3,000
• Cost basis: £2,000
• Capital gain: £1,000
• DAI cost basis: £3,000 (market value acquired)

Wrapped Tokens

HMRC View (Likely Conservative)

Wrapping = CGT disposal:

• ETH → WETH = disposal + acquisition
• WETH → ETH = disposal + acquisition
• Usually no gain/loss if immediate (same value)

Alternative View (Some Advisers)

Wrapping = not a disposal:

• No change in beneficial ownership
• WETH is just a receipt for ETH
• Riskier position without HMRC guidance

⚠️ Recommendation: Conservative approach is safer. If wrapping at same value, the disposal creates no gain/loss anyway.

Airdrops & Governance Tokens

Tax Treatment

Two possible views:

• Income: FMV when received = income
• Capital Gains: £0 cost basis, full proceeds taxable when sold

HMRC hasn't clarified. Most UK advisers recommend CGT approach for unexpected airdrops.

Example: UNI Airdrop

• Receive 400 UNI worth £1,200
• Cost basis: £0
• Sell for £1,800
• Capital gain: £1,800

Section 104 Pool

DeFi tokens follow Section 104 pooling:

• All acquisitions of same token = single pool
• Average cost basis across all purchases
• Exception: same-day rule (same day disposal uses same-day cost)
• Exception: 30-day rule (bed and breakfasting)

Example: Section 104 Pool

• Jan: Buy 100 UNI for £500 (£5 each)
• Mar: Earn 50 UNI (£600 income, £12 each)
• Pool: 150 UNI, cost £1,100 (avg £7.33 each)
• Jun: Sell 75 UNI for £900
• Cost basis: 75 × £7.33 = £550
• Gain: £900 - £550 = £350

Capital Gains Tax Rates

2024/25 Tax Year

Annual Exemption: £3,000 (2024/25)

Income Tax Rates (if DeFi rewards treated as income)

How to Report

Self Assessment Tax Return

1. Capital Gains: Report on SA108 (Capital Gains Summary)
2. Income: Report on SA103 (Self Employment) or SA102 (Employment)
3. List each disposal with: acquisition date, cost, disposal date, proceeds
4. Apply same-day and 30-day rules
5. Deduct £3,000 allowance

Deadlines

• Online: January 31 following tax year
• Paper: October 31 following tax year
• 2023/24 tax year (Apr 6, 2023 - Apr 5, 2024) due Jan 31, 2025

Gas Fees

Allowable expenses for CGT:

• Add gas fees to cost basis when buying
• Deduct from proceeds when selling
• Include in disposal calculation

Record Keeping

Keep records for at least 5 years after Self Assessment deadline:

• Transaction hashes
• Wallet addresses
• GBP values at transaction times
• Gas fees
• Smart contract interactions
• LP token holdings
• Pool entry/exit dates

Tools for DeFi Tracking

• Koinly - Best UK support, HMRC-compliant reports
• CryptoTaxCalculator - Section 104 pooling
• TokenTax - Strong DeFi categorization

Common Mistakes

1. Not using Section 104 pooling: HMRC requires it (not FIFO)
2. Forgetting same-day rule: Overrides Section 104
3. Missing 30-day bed and breakfast rule: Can increase tax liability
4. Not tracking wrapped tokens as disposals: ETH → WETH likely taxable
5. Not reporting small DeFi income: Even under £3,000 CGT allowance must report if required
6. Claiming impermanent loss before realized: Must withdraw first

FAQs

Is DeFi yield taxed as income or capital gains in the UK?

Unclear. HMRC likely treats regular farming as income, while unexpected airdrops may be capital gains (£0 basis). Consult a UK crypto accountant.

Do I pay tax on unclaimed DeFi rewards?

Probably not until claimed and you have control/access.

Are gas fees tax deductible in the UK?

Yes, as allowable expenses for CGT. They increase cost basis or reduce proceeds.

Is providing liquidity a taxable event?

Generally no if you receive LP tokens. Removal may be taxable if token amounts change.

Do I need to report DeFi if I'm under the £3,000 CGT allowance?

If your total proceeds exceed 4× the allowance (£12,000), you must report even if gains are under £3,000.

What if my DeFi tokens are on a non-custodial wallet?

Doesn't matter. HMRC taxes based on beneficial ownership, not custody.