UK Considers New DeFi Tax Regime

The UK government is seeking to make changes to the tax treatment of lending and borrowing on decentralized finance (DeFi) protocols. HM Revenue and Customs has launched a consultation that will run until June 22, 2023, asking for input from investors, professionals, and firms engaged in DeFi activities, as well as representative bodies and think tanks, on a proposed new DeFi tax regime.

Under the proposed changes, crypto used in DeFi transactions would not be treated as a disposal for tax purposes. This means that Capital Gains Tax (CGT), which is typically triggered when an asset is disposed of, would not apply. Instead, a taxable event would occur when cryptocurrencies are disposed of in a non-DeFi transaction.

The consultation states that a transaction must meet certain criteria to be considered a DeFi transaction. Specifically, it should involve the initial transfer of crypto assets from a lender to a borrower, or through a smart contract, with the borrower being obligated to return the tokens. Additionally, the lender should have the right to withdraw the same amount of tokens that were initially lent or staked.

The proposed changes could have a significant impact on the DeFi ecosystem in the UK. As it stands, many DeFi protocols require users to pay transaction fees, which can be subject to taxes. However, if the proposed changes are implemented, these fees could potentially be exempt from taxation, creating a more favorable environment for DeFi activities in the UK.

The consultation is part of the UK government’s wider efforts to regulate the cryptocurrency industry and ensure that it is operating in a safe and secure manner. With the increasing popularity of DeFi protocols, it is crucial that governments and regulators keep pace with these developments to ensure that they can effectively regulate this rapidly evolving sector.

Overall, the proposed changes to the tax treatment of DeFi transactions in the UK could have a significant impact on the industry. If implemented, they could make the country a more attractive destination for DeFi activities and provide a more favorable regulatory environment for individuals and entities engaged in these activities. It remains to be seen how the consultation process will unfold, but it is clear that the UK government is taking steps to ensure that it can effectively regulate the cryptocurrency industry and support the growth of this innovative sector.


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Biden’s Budget Proposal Includes Crackdown on Crypto Wash Sales and Doubling of Capital Gains Tax for Certain Investors

President Joe Biden’s upcoming budget proposal includes a few surprises for crypto traders and investors, as it seeks to raise around $24 billion through changes to crypto tax treatment. The proposal includes a crackdown on crypto wash sales, which are not currently subject to the same rules as stocks and bonds under current wash sale rules, and a doubling of the capital gains tax for certain investors.

One of the proposals aims to eliminate the tax-loss harvesting strategy used by crypto traders. This strategy allows traders to sell assets at a loss for tax purposes before immediately repurchasing them. The proposal seeks to put an end to this strategy, which is not permitted when stocks and bonds are involved, by applying the same wash sale rules to digital assets. If implemented, this change could have significant implications for many crypto holders who entered the market during the 2021 market peaks and are currently suffering from heavy losses.

The Biden budget proposal also seeks to raise the capital gains tax rate for investors making at least $1 million to 39.6%, nearly double the current rate of 20%. This change would only apply to a certain subset of investors, according to a Bloomberg report.

These proposed changes to crypto tax treatment are part of Biden’s plan to reduce the deficit by nearly $3 trillion over the next decade. The budget proposal also includes plans to raise income levies on corporations and wealthy Americans.

The crackdown on crypto wash sales and the proposed doubling of the capital gains tax rate have sparked concerns among crypto traders and investors. However, some experts believe that these changes are an inevitable consideration for the U.S., as it would put it on par with other jurisdictions such as Canada and Australia, where crypto wash sales apply.

Overall, the Biden budget proposal represents a significant shift in the government’s approach to regulating the crypto industry. If these proposals are implemented, they could have far-reaching implications for the industry and its participants.


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South Korea to Delay 20% Capital Gains Tax on Digital Asset Investments until January 2025

Choo Kyung-ho, South Korea’s incoming deputy prime minister and finance minister, announced that he would suspend taxation on stocks and cryptocurrency trading scheduled to be implemented next year for about two years.

Kyung-ho made such announcements at a personnel hearing held by the National Assembly’s Planning and Finance Committee on Monday, May 2.

The finance minister said that besides delaying the financial investment income tax, the government plans to further lower securities transaction tax from next year in order to stimulate stock trading. Kyung-ho mentioned: “It is important also to cut the securities transaction tax to create conditions for good funds and investors to enter the stock market.” The government will decide the extent of the cut at a later date, the executive said.

The securities transaction tax is currently levied at 0.23% per stock trading transaction (based on KOSPI and KOSDAQ). The government initially lowered the securities transaction tax rate from 0.1% to 0.25% in 2020 and further lowered the rates by 0.02% last year. Now the government plans to lower it by 0.08% when the financial investment income tax is implemented next year, according to Kyung-ho’s statement.

The government intends to make such adjustments because the market has stiffened due to a series of negative news in the financial market, like the blockade of major cities in China and the prolonged Russian invasion of Ukraine. Such uncertainties have caused the stock market to freeze and economic vitality to decrease.

Kyung-ho further stated that the government would delay taxation on the virtual currency by two years. The executive emphasised: “If the financial investment income tax is deferred for two years, it is right to view the virtual currency taxation as a two-year deferral under the same framework.”

Initially, the South Korean government planned to begin taxing crypto coins in October 2021, but it delayed the taxation time to January 2022 and then again delayed the plan to January 2023. The incoming administration is trying to delay it again until January 2025.

The government intends to begin taxation after stabilising the unstable crypto market. Kyung-ho explained: “For virtual currency, digital asset-related legislation is being pursued to secure transaction safety and transparency and provide investor protection. Basic policy.”

Crypto Regulations

Last December, the South Korean government postponed the general income taxon digital assets until 2023. The country could have started taxing users on transacted, inherited, and donated cryptocurrencies starting in 2022.

Lawmakers from both the ruling and opposition party had spoken against levying income taxes on digital assets, beginning in January 2022, citing the need for the country to prepare thoroughly for the implementation of new rules.

According to Kyung-ho, taxation from 2025 would be more reasonable after the government creates the legal definition of crypto assets.

South Korea’s tax authorities now plan to impose a 20% tax on capital gains of more than 2.5 million won ($2,116) a year from crypto trading, starting on January 1 2025.

The taxation delay is also part of efforts by lawmakers from both political divides to cater for the interest of millennial and Generation Z investors, whose stake in digital assets is higher than that of other age groups. In the past, these young investors in their 20s and 30s have strongly opposed the crypto tax law.

According to government data, the number of crypto investors in their 20s and 30s made up almost 60% of the total investors in Korea’s four major cryptocurrency exchanges (Dunamu, Bithumb Korea, Korbit, and Coinone).

Image source: Shutterstock


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