DeFi Tax in
the UK.

HMRC's position on staking rewards is the clearest part of DeFi tax. Staking rewards are treated as miscellaneous income under section 687 of the Income Tax (Trading and Other Income) Act 2005. They are taxed in the tax year you receive them, at your marginal income tax rate (20%, 40%, or 45%).

The amount to report is the sterling value of the tokens on the date you receive them. If you receive 0.1 ETH as a staking reward when ETH is trading at £2,400, you report £240 as income.

That £240 figure also becomes your cost basis for CGT purposes. When you later sell or dispose of those 0.1 ETH, your allowable cost is £240. If you sell for £300, your capital gain is £60. If you sell for £180, your capital loss is £60.

Worth knowing: there is a distinction between staking on a proof-of-stake network (such as Ethereum) and lending or locking tokens in a protocol to earn a yield. HMRC's guidance covers staking rewards explicitly, but lending yields may be treated differently in some arrangements. The substance of what you're doing matters more than what the protocol calls it.

Yield farming — deploying tokens to DeFi protocols in exchange for additional tokens as a return — creates two distinct tax events.

Event one: receipt of yield tokens. When you receive governance tokens, reward tokens, or other assets as yield, HMRC treats these as income at the market value on the date of receipt. The same logic applies as with staking rewards. You report the sterling value as miscellaneous income, and that value becomes your cost basis.

Event two: disposal of yield tokens. When you sell, swap, or spend the tokens you earned, you create a capital disposal. The gain or loss is calculated against the cost basis established at receipt.

The net result is that yield farming tokens get taxed twice in different ways: once as income when you receive them, and once as a capital event when you dispose of them. The income tax applies to the full value at receipt; the CGT applies only to any appreciation after that point.

In a rising market, this is manageable. In a declining market, it creates the uncomfortable situation where you paid income tax on tokens that are now worth less than the tax bill. That is not an error — it is the correct treatment under current rules.

Liquidity pools are among the most contested areas of DeFi tax. When you add tokens to a pool (on Uniswap, Curve, or similar protocols), you typically receive LP tokens in return. HMRC's Cryptoassets Manual addresses this structure directly.

Adding liquidity.HMRC's view is that depositing tokens into a liquidity pool in exchange for LP tokens is a disposal of the deposited tokens. You disposed of, say, £5,000 of ETH and £5,000 of USDC in exchange for LP tokens. The disposal creates a CGT event on the deposited tokens at the point of deposit.

Removing liquidity.When you redeem your LP tokens and receive your underlying tokens back (plus any accumulated fees), this is a second disposal — this time of the LP tokens. Your gain or loss on the LP tokens is calculated from their cost basis at the point you received them.

In practice, impermanent loss complicates the calculation. If the ratio of tokens changes between deposit and withdrawal, the amounts you get back differ from what you put in. You need to record the sterling value of both the LP tokens received and the tokens withdrawn at both dates.

Here's the thing: some tax professionals argue that adding liquidity in exchange for LP tokens of the same economic value is not a true disposal — similar to moving shares between nominee accounts. HMRC has not issued definitive guidance resolving this argument. The conservative position (which HMRC appears to favour based on its 2022 guidance) treats it as a disposal.

Wrapping a token — converting ETH to wETH, BTC to WBTC, or similar — creates a disposal under HMRC's current interpretation. You disposed of one token type and acquired a different one.

The fact that wETH and ETH are economically equivalent and typically trade at parity does not change the analysis. HMRC treats them as different assets. The disposal of ETH is calculated at the market value of wETH received.

In practice, wrapping at parity with no fee generates a gain of zero (or a trivial gain or loss from rounding). The obligation is to record the event and confirm the calculation, not necessarily to pay tax. But the recording requirement still applies, and the disposal still consumes part of your annual exempt amount.

Bridging tokens across chains — moving ETH from Ethereum mainnet to Arbitrum, for example — raises similar questions. The bridge mechanics vary: some protocols burn and mint, others lock and release. HMRC has not published specific guidance on bridging. The conservative position treats the receipt of bridged tokens as a disposal of the original tokens.

Many DeFi protocols distribute governance tokens — Uniswap's UNI, Compound's COMP, Aave's AAVE — to users who interact with the protocol. These distributions are typically treated as income at the sterling value on the date of receipt.

Whether a specific distribution is income or not depends on whether there is a sufficient link between the receipt and a service you provided. HMRC draws a distinction between tokens received for activity (income) and tokens received as a windfall airdrop with no strings attached (which may be capital with a nil cost basis).

In reality, most governance token distributions to active protocol users are likely income. The tokens were earned through use of the protocol, and the protocol's distribution mechanism was designed to reward that activity. That is close enough to a service relationship to bring income tax into play under most reasonable interpretations.

DeFi record-keeping is harder than centralised exchange activity because there is no single platform holding your history. Your records need to come from on-chain data.

Tools like Etherscan, Solscan, or Debank let you export transaction histories for a given wallet address. DeFi tax software — Koinly, Coinpanda, and CryptoTaxCalculator all support DeFi integrations — can import these and attempt to classify transactions automatically. The classifications are not always correct, so manual review is usually required for complex positions.

For each DeFi interaction, record: the protocol used, the date and time, the tokens sent and received, the sterling value of each at the time of the transaction, and the gas fees paid (which are allowable costs and reduce your gain).

Gas fees paid to enter and exit a position are treated differently to gas fees paid for simple transfers. Fees directly attributable to a disposal are deducted from that disposal. Fees that are not directly attributable to a specific disposal may not be deductible at all.