DeFi is the most complex area of UK crypto tax — and the area where HMRC's guidance is most incomplete. Some scenarios are clear; many are genuinely uncertain. Here is the current position, with an honest flag on where uncertainty remains.
The central question: does this DeFi transaction constitute a disposal?
HMRC's position (as set out in their 2022 DeFi guidance) is that a disposal occurs when you transfer ownership of an asset — specifically, when the rights and risks associated with the asset pass to another party. Applied to DeFi, this catches more transactions than many users expect.
A simple on-chain swap of ETH for DAI via Uniswap is clearly a disposal of ETH. The more complex question is whether depositing assets into a protocol (and receiving LP tokens or interest-bearing tokens in return) also constitutes a disposal.
Liquidity pools and LP tokens
When you deposit ETH and USDC into a liquidity pool and receive LP tokens in return, HMRC's guidance suggests this may constitute a disposal of the deposited assets and an acquisition of the LP tokens — if the rights and risks of the underlying assets have effectively transferred to the protocol.
On withdrawal, the reverse applies: disposing of the LP tokens and reacquiring the underlying assets (at whatever ratio the pool has adjusted to). Any impermanent loss at this point would be reflected in the gain/loss calculation.
HMRC's 2022 DeFi guidance explicitly states it cannot cover all possible DeFi scenarios. Whether a specific protocol constitutes a disposal depends on its specific mechanics. If you have significant liquidity pool positions, professional advice before year end is strongly recommended — not after.
Yield farming rewards and protocol incentives
Tokens received as rewards from yield farming protocols are generally treated as income at the GBP value on the date of receipt. This includes:
- —Governance tokens received as liquidity mining incentives (e.g. UNI, COMP, AAVE)
- —Yield farming rewards from protocols like Yearn, Convex, or similar
- —Trading fee revenue distributed to liquidity providers in token form
These token receipts become your cost basis for CGT purposes when you later dispose of them.
Lending protocols: Aave, Compound, and interest-bearing tokens
Depositing assets into Aave or Compound and receiving aTokens or cTokens in return sits in a genuine grey area. These tokens represent a claim on the deposited assets plus accruing interest. HMRC has not definitively stated whether the exchange of assets for these tokens constitutes a disposal. Conservative treatment: treat it as a disposal; progressive treatment: treat it as a collateralised loan. Either position carries risk and professional advice is needed for significant positions.
Practical steps for DeFi users
- —Keep detailed records of every DeFi interaction: date, protocol, assets in, assets out, GBP value at the time
- —Record LP token quantities and the implied underlying asset values at entry and exit
- —Track reward token receipts with GBP values at the date of each receipt
- —Export on-chain transaction history from Etherscan or equivalent for every wallet address
Frequently asked questions
Are ETH/USDC swaps on Uniswap taxable?
Yes. A swap on any DEX is treated the same as a swap on a centralised exchange. You are disposing of one asset and acquiring another. Any gain on the asset you are giving up is subject to CGT. The fact that it is on-chain and decentralised does not change the tax treatment.
I received governance tokens (UNI, AAVE, COMP) for using a protocol. Are those taxable?
Yes, as income. Governance tokens received as protocol incentives are generally treated as miscellaneous income at the GBP value on the date you receive them. When you later sell those tokens, any gain above the income value is a capital gain.
What about liquid staking — does staking ETH for stETH count as a disposal?
This is one of the most uncertain areas. Lido's stETH represents staked ETH, and HMRC may treat the exchange as a disposal of ETH. The conservative position is to treat it as taxable. Some advisers argue it is more analogous to a deposit receipt. Given the uncertainty, professional advice is recommended for significant stETH positions.
How do I value rewards that are paid in obscure or illiquid tokens?
Use the GBP market price at the date of receipt based on available market data. If the token has no reliable market price (e.g. a newly launched governance token), document the basis for whatever valuation you use. HMRC expects a best reasonable estimate, not perfection.
Do I need to track every DeFi transaction individually?
Yes, in principle — each transaction is a separate taxable event and needs to be individually valued in GBP at the time. In practice, DeFi-focused tax tools can import on-chain data and do this automatically. If you have hundreds of interactions, manual tracking is not practical.
Can I carry forward DeFi losses?
Yes — losses from DeFi disposals can be carried forward to offset future capital gains, just like any other capital loss. You must report them on SA108 in the year they arise. Impermanent loss, if it results in withdrawing fewer assets than you deposited, may crystallise a capital loss on withdrawal.
General information only. DeFi tax treatment is evolving rapidly. Professional advice is strongly recommended for active DeFi users.