Three years after consulting on a regime based on the repo and stock-lending rules, the government has published draft legislation for cryptoasset loans and liquidity pools.
The result is much closer to the no gain, no loss approach that was originally left on the sidelines.
Read on for my initial take on this draft legislation (albeit from my sun-lounger in Italy)
Key points
- Draft legislation would introduce a new Capital Gains Tax regime for certain cryptoasset lending, borrowing and automated market making arrangements.
- The rules are based on a no gain, no loss principle and would apply to individuals and trustees from 6 April 2027.
- The government has moved away from the repo-style approach around which its 2023 consultation was framed.
- Matching quantities of the same type of cryptoasset would generally be returned on a no gain, no loss basis, but gains or losses could arise where the type or quantity differs.
- Companies are excluded, rewards remain subject to the existing income and capital distinction, and there is no general retrospective relief.
Three years later
In May 2023, I considered the government’s consultation on the taxation of decentralised finance, or DeFi. At the time, I welcomed the fact that HMRC was engaging with the subject, but wondered whether it was trying to make the new digital world fit too neatly into the existing repo and stock-lending framework.
The government had considered three possible approaches.
Option 1 would have brought cryptoassets directly within the existing repo and stock-lending provisions by treating them as securities for those purposes.
Option 2, which formed the basis of the 2023 consultation, involved creating a separate regime for cryptoasset lending and liquidity provision based on the principles underlying the repo and stock-lending rules.
Option 3 was a no gain, no loss, or NGNL, regime. A transfer into a qualifying arrangement would be treated as taking place at a value that produced neither a gain nor a loss. The tax consequences would therefore be deferred until the cryptoassets were economically disposed of.
At the time, I suggested that the third option, or perhaps an even broader statutory disregard, might be the more straightforward way to reflect the economic substance of the transactions.
Three years later, that is broadly where the government has ended up.
Following further engagement, HMRC concluded that the repo-style approach might not sufficiently reduce administrative burdens. The government’s subsequent response recorded concerns that such an approach would still require participants to track liquidity tokens and other rights, sometimes across positions that are continuously increasing, decreasing or changing. It therefore developed the NGNL model that now forms the basis of the draft legislation.
This is not quite the one-line statutory disregard that might appeal to those of us who believe tax legislation occasionally benefits from fewer words. However, the central principle is the same in that an investor should not ordinarily be taxed simply because cryptoassets have been moved into an arrangement while the investor retains substantially the same economic exposure.
The elephant in the room
The difficulty under the present law begins with beneficial ownership.
HMRC’s current view is that the legal terms of each arrangement must be examined to determine whether the lender or liquidity provider has transferred beneficial ownership of the tokens. If the recipient can deal freely with the tokens, this is a strong indication that beneficial ownership has passed.
Where beneficial ownership is transferred, there will generally be a disposal for Capital Gains Tax purposes. The lender may be treated as disposing of the original tokens in exchange for a right to receive tokens in the future. Where a liquidity token is issued, HMRC may instead regard the transaction as an exchange of the contributed token for the liquidity token. Further disposals can arise when the lending arrangement is satisfied or the liquidity position is withdrawn.
The tax analysis may therefore be technically correct while appearing detached from the investor’s economic experience.
An investor who lends ten tokens and expects ten tokens back does not usually believe that the investment has been sold. Similarly, an investor who contributes tokens to a liquidity pool may view those assets as having been put to work rather than disposed of.
That was the elephant in the room in 2023. It remains the reason legislation is required.
The government’s stated policy objective now expressly reflects this concern. Gains and losses should generally be recognised when the participant makes an economic disposal, rather than when the participant merely enters into or withdraws from a qualifying lending or liquidity arrangement.
Staking still has a split personality
The earlier consultation used ‘staking’ as a general description for making tokens available to a DeFi platform. However, that term has always had more than one meaning.
Proof-of-stake validation involves using or locking tokens as part of the process by which a blockchain network validates transactions and achieves consensus. Cryptoasset lending and liquidity provision are economically different activities, even though the word ‘staking’ is sometimes used to describe them as well.
The government has now largely adopted that distinction in its terminology. Its more recent documents refer to ‘cryptoasset loans and liquidity pools’, explaining that the change is intended to distinguish these arrangements from other forms of staking. The draft legislation itself is confined to three defined categories and does not create a general regime for proof-of-stake validation.
Nor are the rules necessarily limited to arrangements that are truly decentralised. A qualifying lending arrangement could be operated through a centralised intermediary. The government has consistently said that economically equivalent CeFi arrangements should be capable of falling within the same regime.
What has been published?
The draft legislation was published on 13 July 2026 as part of the draft measures for Finance Bill 2026-27. The technical consultation closes on 7 September 2026. The final contents of the Bill remain subject to the Chancellor’s decision, so the legislation is not yet law.
If enacted in its present form, the legislation would insert a new Part 4A into the Taxation of Chargeable Gains Act 1992. It would apply from 6 April 2027 and cover three areas:
- Single cryptoasset lending arrangements.
- Single cryptoasset borrowing arrangements.
- Automated market making arrangements.
HMRC estimates that approximately 700,000 individuals engage in transactions potentially affected by the measure.
Who and what are within the rules?
The new Part 4A would apply to a ‘person other than a company’. The policy paper describes those affected as individuals and trustees.
Companies are therefore excluded. That is an important restriction, particularly given that the 2023 consultation contemplated whether similar rules might be made available for companies. A corporate participant in a non-stablecoin lending or liquidity arrangement will not benefit from this new Part 4A merely because an economically identical transaction undertaken by an individual would qualify.
The underlying assets must also be ‘qualifying cryptoassets’.
A cryptoasset is broadly defined as a digital representation of value that relies on a cryptographically secured distributed ledger, or similar technology, to validate and secure transactions. However, a security or tokenised asset is generally excluded.
A tokenised asset is a cryptoasset representing rights in another asset. There are exceptions for, among other things, rights over another qualifying cryptoasset, rights to returns under the relevant arrangements and rights to redeem a token for a fixed amount of fiat currency. These exceptions may assist some wrapped tokens and stablecoins, although the precise legal and technical features of the token will be important.
Tokenised real-world assets and tokenised securities are likely to fall outside the regime unless one of the statutory exceptions applies.
The Treasury would be given power to alter the definition through regulations approved by the House of Commons.
Single cryptoasset lending
The first category covers arrangements that are economically equivalent to lending.
Broadly, qualifying cryptoassets of one type must be made available under the arrangements. The participant must acquire an interest carrying a right to become unconditionally entitled to a specified number of cryptoassets of the same type and to a return.
The arrangements must also:
- Be genuine and commercial.
- Satisfy a low-risk-of-loss condition.
- Involve either unconnected parties or interests that are widely available to a substantial number of independent participants.
The participant’s interest in the arrangement is expressly treated as an asset for Capital Gains Tax purposes. At the same time, the participant is not treated as having an interest in any other asset merely by virtue of holding that statutory interest. This should provide a clearer CGT object than the present need to identify and value a collection of contractual rights, although the treatment of the return element will still require care.
Basic disregard revisited
Suppose Liz owns ten tokens with a total pooled base cost of £4,000. She lends the ten tokens through a qualifying arrangement and acquires a right to receive ten tokens of the same type together with a return.
Under the draft rules, the disposal of the ten tokens in exchange for the lending interest would be treated on an NGNL basis. The £4,000 base cost would effectively be carried into the interest.
When the loan is repaid, the disposal of the relevant part of the interest in exchange for up to ten tokens of the same type would also take place on an NGNL basis. Those returned tokens would inherit the corresponding base cost.
The result is that no gain or loss is recognised merely because Liz entered into and exited the loan. A gain or loss would ordinarily arise when she eventually sells or otherwise economically disposes of the returned tokens.
If she receives two additional tokens as her return, however, those additional tokens are not part of the matching principal quantity. Their taxation must be considered separately.
The draft therefore achieves the ‘basic disregard’ envisaged in the earlier consultation, but it does so by treating the lending interest as a statutory asset and applying NGNL treatment to the matching parts of the transactions.
Selling the liquidity or lending interest
The position changes if the participant sells the lending interest or liquidity token to somebody else rather than redeeming it for qualifying tokens of the same type.
If Liz sells her interest for cash, another cryptoasset or some other form of consideration, the matching NGNL rule will not ordinarily apply. She has economically disposed of the interest and a gain or loss should be calculated under the normal rules.
This is consistent with the underlying policy. Entry into the arrangement should not itself produce a tax charge, but an actual sale of the economic position should.
How low is low risk?
The low-risk-of-loss condition is likely to be one of the more contentious aspects of the draft.
The condition is met only where, taking account of all the characteristics of the arrangements, it is reasonable to conclude that there is no significant risk that the participant will be unable to realise the entitlement to the relevant number of tokens.
This may exclude undercollateralised loans, highly leveraged arrangements and protocols with a material risk of default or liquidation. More difficult is the treatment of ordinary smart-contract, hacking, counterparty and protocol risk.
The consultation responses identified bankruptcy, insolvency, forced liquidation, theft, fraud, blockchain failure, smart-contract errors, sanctions and blacklisting as events that might prevent the participant recovering the tokens.
Almost every cryptoasset arrangement carries some such risk. The technical consultation will need to establish where an ordinary commercial risk becomes ‘significant’, when that test is applied and what happens if the risk profile changes during the arrangement.
There is also a potential cliff edge. If the condition is not satisfied, the transaction does not appear to receive a reduced version of the relief. It falls outside the statutory definition, leaving the participant to apply the existing law.
The borrower’s position
The original discussion understandably concentrated on lenders and liquidity providers. The draft now contains a separate regime for individual and trustee borrowers.
Where qualifying cryptoassets are borrowed, the borrower would be treated as acquiring them at their market value at the time of borrowing. When cryptoassets of the same type are returned to the lender, the borrower would be treated as disposing of them for that original acquisition value.
For example, assume an individual borrows ten tokens worth £2,000 each and immediately sells them for £20,000. The deemed acquisition cost is also £20,000, so the immediate sale produces no gain.
The individual later acquires ten replacement tokens for £15,000 and returns them to the lender. The repayment is treated as a disposal for £20,000, producing a gain of £5,000. That reflects the borrower’s economic profit from the fall in the token’s value.
Collateral provided under the arrangements would generally be disregarded for CGT purposes. If it becomes apparent that the collateral will not be returned, the borrower would be treated as disposing of it at market value at that time.
Special provisions also apply if it becomes apparent that the borrowed tokens will not be returned. Eligible stablecoins are excluded from the principal borrowing rule because they are dealt with under the companion stablecoin proposals.
Automated market makers
The treatment of multi-token liquidity pools was one of the gaps in the original proposal.
A conventional automated market maker, or AMM, allows a participant to contribute two or more types of token to a liquidity pool. Other users trade against the pool, with prices determined automatically by a smart contract.
The liquidity provider may later withdraw a different quantity of each token from the quantity originally contributed. For example, someone who contributes ETH and a stablecoin might receive fewer ETH and more stablecoins when the position is closed.
In the earlier article, I noted that a rule requiring the return of the same quantity of the same token did not sit comfortably with this model. Indeed, the changing composition of a liquidity pool is one of its defining features.
Respondents to the consultation made the same point. The vast majority considered it crucial that multi-token AMMs should be included. Almost all of those suggesting a solution favoured an NGNL treatment on entry and exit, with gains or losses recognised by reference to any difference in the quantities ultimately received. (GOV.UK)
The draft legislation now expressly addresses that problem.
To qualify, the arrangements must:
- Involve a pool containing at least two types of cryptoasset.
- Operate through a smart contract.
- Include an automated protocol that sets prices by reference to the quantities of assets in the pool.
- Be genuine and commercial.
- Be widely available both to independent liquidity providers and independent traders.
The participant is treated as holding a separate interest relating to each type of cryptoasset contributed.
On entry, the transfer of each qualifying cryptoasset in exchange for its corresponding interest takes place on an NGNL basis. On exit, the NGNL treatment applies to cryptoassets of the same type up to the relevant quantity associated with that interest.
Pairs contributed to a liquidity pool
Suppose Oscar contributes ten units of Token A and 1,000 units of Token B to a qualifying AMM.
When he later withdraws his position, he receives eight units of Token A and 1,250 units of Token B.
The matching element is dealt with on an NGNL basis. However, Oscar has received two fewer units of Token A and 250 additional units of Token B.
The Token A shortfall produces a loss based on the appropriate proportion of the base cost allocated to the Token A interest. The additional Token B produces a gain by reference to its market value. The detailed calculation is therefore made separately for each token.
This is an improvement on the original proposal. Rather than excluding the transaction because Oscar did not receive the same quantities back, the legislation recognises the economic conversion that occurred within the pool.
It also means that ‘impermanent’ loss or gain does not remain permanently outside the tax computation. It is recognised when the liquidity position is withdrawn, to the extent that the quantities have changed.
Returns on investment
The draft legislation deals with the Capital Gains Tax treatment of the principal assets and the interests in the arrangements. It does not introduce a universal rule for the return generated by lending or liquidity provision.
The 2023 consultation had asked whether all DeFi returns should be deemed to be revenue in nature. I was sceptical about that suggestion. Distinguishing capital from revenue may be inconvenient, but it is one of the foundations on which the tax system is built.
Respondents were overwhelmingly of the same view. They warned that an all-revenue treatment could misalign the tax result with the economics, produce higher liabilities, distort how arrangements were structured and create difficulties for non-residents and charities. The government subsequently confirmed that it was not pursuing specific provisions to change the taxation of rewards from cryptoasset loans and liquidity pools.
The existing distinction therefore remains.
A return that is income in nature may be subject to income tax, commonly as miscellaneous income unless the activity amounts to a trade. A capital return may instead fall within Capital Gains Tax. The facts and legal rights created by the arrangement remain important.
This avoids the bluntness of treating every return as income, but it does not remove the practical difficulty of valuing frequent, illiquid or automatically compounded rewards. Nor does it necessarily eliminate dry tax charges in relation to those rewards.
There is a separate development for eligible stablecoins. Under the companion draft legislation, certain interest-like returns from eligible stablecoins would be treated as savings income. Disposals of eligible stablecoins by individuals and trustees would generally be exempt from Capital Gains Tax.
The two sets of draft rules will therefore need to be read together where stablecoins are used in lending or liquidity arrangements.
Reporting and record keeping
The earlier proposal contemplated reporting carve-outs as part of the attempt to reduce the administrative burden.
The present draft amends section 8C of the Taxes Management Act 1970 so that the relevant NGNL transactions are not treated as ‘chargeable disposals’ for the gross proceeds test in that section. Consequently, a large volume of matching lending or liquidity transactions should not, by itself, cause a taxpayer to exceed the £50,000 consideration threshold used in determining the extent of CGT reporting required in a Self Assessment return.
That does not mean record keeping can be abandoned.
Participants will still need to record:
- The type and quantity of each cryptoasset contributed.
- The base cost transferred into each statutory interest.
- Additions to and partial withdrawals from a position.
- The quantities and types of assets received on exit.
- Rewards and other consideration falling outside the matching quantity.
- Disposals of lending interests or liquidity tokens to third parties.
For AMMs in particular, the requirement to maintain a separate relevant quantity and base cost for each token interest may still require specialist software.
The regime should reduce the number of immediate taxable events. It will not turn an active DeFi transaction history into a shoebox containing three tidy contract notes.
Retrospection and transition
In the conclusion to the earlier article, I asked whether any new regime would be made retrospective for investors who had already become entangled in the existing rules.
The answer is largely no.
For lending and AMM arrangements, the substantive provisions apply to transactions occurring on or after 6 April 2027. The borrowing rules apply where qualifying cryptoassets are transferred to the borrower on or after that date. There is no general election allowing earlier transactions to be reconstructed under the new NGNL regime.
There are, however, transitional provisions for existing positions.
Where a lending or AMM interest was acquired before commencement and would not otherwise be an asset for CGT purposes, it is treated as always having been an asset. From 6 April 2027, the participant will no longer be regarded as having a separate interest in the contributed assets merely by virtue of holding that arrangement interest.
There is a further rule for certain pre-existing lending interests that will become exempt, including interests connected with eligible stablecoins. These are deemed to be disposed of and immediately reacquired at market value immediately before 6 April 2027, with the resulting gain or loss treated as accruing on 6 April 2027.
Anyone expecting to hold a lending or liquidity position across commencement will therefore need to examine the transitional rules rather than simply assuming that the original base cost rolls forward unchanged.
What still needs to be considered?
The direction of travel is welcome, but the technical consultation has plenty to occupy itself with.
The low-risk-of-loss condition needs workable boundaries. The meaning of the ‘same type’ of cryptoasset will also be important for wrapped, bridged, migrated, rebasing and upgraded tokens.
The widely available condition may exclude private lending arrangements and permissioned liquidity pools. Connected-party lending will qualify only where the alternative widely available condition is met.
The exclusion of securities and tokenised assets could leave an increasing category of tokenised real-world asset transactions outside the regime. Companies are omitted altogether.
The treatment of rewards remains dependent on the existing capital and revenue principles, while sales or transfers of liquidity tokens and lending interests will continue to require separate CGT calculations.
Finally, the legislation will need to cope with protocols that change while a position is open. A lending product may migrate to a new smart contract, alter its collateral requirements or issue a replacement token. It is not immediately clear whether each such event should be treated as part of the original arrangement or as a disposal and acquisition involving a new interest.
Detailed HMRC guidance will therefore be as important as the legislation itself.
Conclusion
When considering the 2023 consultation, I wondered whether the government had missed an opportunity by choosing a framework derived from repo and stock lending rather than adopting a broader NGNL approach.
It appears that the consultation process has brought the government back towards that simpler principle.
The draft rules should prevent tax charges from arising merely because an individual has lent tokens or contributed them to a qualifying liquidity pool while retaining the economic exposure. They also deal expressly with borrowers and with the changing token quantities produced by AMMs.
This does not amount to ‘tax nothing’. It is principally ‘tax later’, when there has been an economic disposal.
There are still limitations. The regime is conditional, prospective and unavailable to companies. Returns remain complex, and some protocols and assets will fall outside the statutory definitions.
Nevertheless, the government has listened to the concerns raised during the consultation and altered its approach. The central principle is now the right one. The challenge is ensuring that the statutory conditions do not turn a measure intended to reflect economic reality into another exercise in fitting decentralised transactions into overly rigid boxes.
The technical consultation remains open until 7 September 2026. The draft may change before the Finance Bill is introduced.
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HMRC links
- HMRC general note: https://www.gov.uk/government/publications/cryptoasset-loans-and-liquidity-pools/tax-treatment-of-cryptoasset-loans-and-liquidity-pools
- HMRC draft legislation: https://www.gov.uk/government/publications/cryptoasset-loans-and-liquidity-pools/draft-legislation-accessible-version