UK Launches Tax Crackdown On Crypto Transactions By Residents

The UK will require domestic crypto exchanges to report transactions by local residents from next year as it plugs a gap in reporting rules.

The change will give the tax authority, His Majesty’s Revenue and Customs (HMRC), access to domestic and cross-border crypto transaction data for the first time.

CARF To Roll Out In 2027

The change will expand the scope of the Cryptoasset Reporting Framework (CARF), a cross-border reporting framework that was developed by the Organisation for Economic Co-operation and Development (OECD). 

The framework enables the sharing of information between tax authorities worldwide, and will require crypto asset service providers to perform due diligence, verify user identities, and report detailed transaction information on an annual basis. 

CARF’s first global information exchange is set to take place in 2027.

UK Aims To Prevent Crypto Escaping Common Reporting Standard 

Given that CARF is a cross-border framework, crypto transactions that occur directly within the UK would fall outside of the automatic reporting channels, according to a policy paper shared by HMRC earlier this week. 

Description of HMRC’s new measure (Source: UK Government)

The goal behind extending CARF’s scope to cover domestic users is to prevent crypto from becoming an “off-CRS” asset class that escapes the visibility applied to traditional financial accounts under the Common Reporting Standard. 

UK officials have also said that by expanding the scope of CARF to domestic activity, tax authorities will gain access to a more complete data set to identify non-compliance and better assess taxpayer obligations. 

UK Proposes “No Gains, No Loss” Tax Rule For DeFi

The reporting change and expansion of CARF’s scope in the UK comes shortly after HMRC signaled support for a “no gain, no loss” (NGNL) approach to crypto lending and liquidity pool arrangements earlier this week. 

Currently, when a decentralized finance (DeFi) user deposits funds into a protocol, even if it’s to monetize those funds or take out a loan against them, the move could be treated as a disposal and trigger capital gains tax. The NGNL move could defer capital gains tax until there is a true economic disposal. 

In practical terms, the NGNL proposal could mean that users who deposit crypto into lending protocols, or who contribute assets to automated market makers, would no longer be taxed at the point of deposit. Instead, the tax would only be applied when they eventually sell or trade their assets in a way that realizes either a gain or a loss. 

The proposal seeks to align tax rules with how DeFi actually works. It would also help reduce admin burden and tax outcomes that do not reflect the economic reality of some activity that takes place in the DeFi space. 

The NGNL approach would also apply to multi-token arrangements used in decentralized protocols, which are often complex. For instance, if a user receives more tokens back than they deposited, the gain would be taxed. However, the transaction would be treated as a loss if the user receives less tokens than they had deposited.