Upland: Berlin is here!

UK accounting services leaders challenge HMRC’s view was suggested The tax framework for decentralized finance (DeFi) transactions has been labeled as “fit for purpose.”

In a letter to the UK tax authority HMRC, written by experts such as tax software provider Recap and chartered accountants, Wright Bigger captures the unique characteristics of the rapidly evolving DeFi sector in a more nuanced way. emphasized the need for a customized taxation approach. .

This action is a response to recent DeFi talks made by HMRC. According to the joint report, the examples used in government consultations do not fully represent mainstream market activity. They revealed a lack of understanding of complex transactions involving multiple assets and partial redemption of DeFi positions.

Experts criticized the proposed “repo-like” solution for DeFi taxation, highlighting its failure to address the complexity and peculiarities of crypto and the DeFi sector.

Both organizations also challenge the notion that all DeFi rewards should be classified as income, and offer arguments for the possibility of treating these rewards as zero-cost capital. Howitt, co-founder and CEO of Recap, emphasized the importance of a well-informed and comprehensive regulatory framework. he said,

“The UK aspires to become one of the most prominent hubs for crypto assets, and to that end, we want our regulations and laws in this area to be well-informed, comprehensive and as specific as possible. that is important.”

Louise Lane, Associate Tax Director at Right Bigger, highlighted the complexities of navigating the crypto world. Criticizing the unnatural nature of the scenarios used in the HMRC report, he stressed the importance of expertise and innovation in the field. Treating rewards as capital simplifies and reduces complexity, according to Lane.

tax bill

Recap and Wright Vigar have proposed an “asset mix no gain no loss” approach as a potential solution to the complex DeFi tax position. They believe this rights-based approach will work for all his DeFi activities. They propose a process of grouping the rights that exist for each asset into positions.

When disposing of a position or an asset representing a position, a disposition calculation is performed on a per-entitlement basis taking into account changes in the composition of the received assets. Asset mix differences are treated similarly to acquisitions, disposals, or swaps.

Details of the proposal include disposal of principal tokens at No Gain No Loss (NGNL) upon joining all DeFi agreements and shifting acquisition costs to LP tokens/entitlements. Tax treatment upon exit depends on the type and amount of removed tokens. If the same type and quantity of tokens entered or exited, the LP/token will be disposed of at NGNL on exit and the acquisition cost will be passed on to the returned tokens.

NGNL disposition of LP tokens/entitlements at exit is performed up to the added principal tokens if they contain the same type of tokens but different amounts of entries. Any surplus or deficit of Principal Tokens will be subject to Capital Gains Tax (CGT) upon termination. CGT charges apply if different types of assets are terminated.

Their approach is validated by ensuring that pool costs are calculated correctly in each scenario, taking into account any potential gains or losses that may occur. The formula “previous pool total cost = post-pool total cost + profit – loss” serves as the basic formula for their proposed method.

Recap and Wright Vigar formally asked HMRC for clarification on the DeFi tax position of taxpayers in the tax year before the new law was introduced. They have clear guidelines for treating DeFi transactions fairly and consistently, emphasizing the importance of providing certainty to individuals and businesses operating in this rapidly emerging field.

Recap and Wright Vigar advocate continued cooperation and dialogue with HMRC and other relevant authorities to achieve an informed and balanced regulatory environment for DeFi and crypto-assets.You can see the full reaction from these cryptocurrency leaders here.

By Jules

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