Staking and DeFi Taxation: HMRC's 2024 Updated Position

HMRC's DeFi Framework

HM Revenue & Customs published its first comprehensive DeFi guidance in July 2022 (CRYPTO60000 onwards), followed by a consultation on further reform in 2023 and updated guidance published in late 2024. The framework attempts to apply existing UK tax law — designed for traditional financial instruments — to a fundamentally different technology layer.

The core analytical question for any DeFi transaction is whether:

1. A disposal of the underlying cryptoasset has occurred (creating a CGT event), and/or
2. Income has been received (taxable as income from whatever source is applicable)

HMRC's answers to these questions depend on the specific legal and technical structure of each DeFi protocol, which varies significantly. HMRC does not give blanket answers — it requires a protocol-by-protocol, transaction-by-transaction analysis.

Staking Rewards

Proof-of-Stake Validation Rewards

Individuals who directly stake cryptocurrency (e.g., staking ETH on the Ethereum network to participate in proof-of-stake consensus) receive staking rewards — new tokens issued as compensation for validating transactions.

HMRC's position (CRYPTO60430): staking rewards are taxable as miscellaneous income at the point of receipt, based on the market value of the tokens received at the time of receipt. This is consistent with the treatment of mining rewards under proof-of-work protocols.

The income amount establishes the base cost of the received tokens. When those tokens are later disposed of, any additional gain (or loss) is subject to CGT.

The Income vs Capital Receipt Debate

The income characterisation of staking rewards has been challenged by practitioners on several grounds:

Argument 1 — No economic cost: Staking does not involve providing services — it involves locking up assets that the validator already owns. The reward could be characterised as a return on capital (analogous to interest or a CGT receipt) rather than a service income.

Argument 2 — No separate transaction: In pure proof-of-stake, no separate transaction creates the right to receive rewards. The rewards flow automatically from holding and staking the asset. This could support a "capital accretion" analysis.

HMRC's counter: The staker is performing an economic function (validating transactions) and is receiving compensation for that function. That is income, even if the staker also owns the staked assets.

The 2024 updated HMRC guidance acknowledged the debate but did not change the income classification — it confirmed that staking rewards remain miscellaneous income in HMRC's view. The position remains open to challenge before the Tax Tribunal.

Delegated Staking and Staking Pools

Many individuals stake through pools or by delegating their tokens to a validator (rather than running a validator node themselves). HMRC's guidance confirms that the income treatment applies equally to delegated staking — the fact that a third party operates the validator node does not change the characterisation of the reward for the delegator.

Staking Activity	HMRC Classification	Income or Capital?
Direct proof-of-stake validation	Miscellaneous income	Income at receipt
Delegated staking (e.g., Lido, Rocket Pool)	Miscellaneous income	Income at receipt
Staking via a centralised exchange	Interest-like income or miscellaneous	Income at receipt
Liquid staking token receipt (stETH, rETH)	May be disposal + income	Both possible

Liquid Staking: The Wrapped Token Complication

Liquid staking protocols (Lido, Rocket Pool, Frax) issue a liquid staking token in exchange for deposited ETH. For example, depositing ETH into Lido results in the receipt of stETH (staked ETH). The stETH can be freely traded or used in DeFi while the underlying ETH is staked.

The wrapping/unwrapping question: Is exchanging ETH for stETH a disposal for CGT purposes?

HMRC's position (CRYPTO61100): where an exchange of tokens occurs, it is a disposal of the original tokens and an acquisition of the new tokens. The critical question is whether the exchange involves a change in the underlying ownership rights that constitutes a disposal.

For liquid staking: HMRC considers that depositing ETH into Lido and receiving stETH is likely a disposal of the ETH, because the individual has exchanged their direct claim on ETH for a different asset (stETH) with different rights. The stETH then has a base cost equal to its value at the time of acquisition.

This position is significant because it means that individuals who deposited ETH at a low price, received stETH representing significant accrued gains, and then later unwrap back to ETH have two potential CGT events — one on the wrap and one on the unwrap — rather than recognising gains only on the final sale.

DeFi Lending

Supplying tokens to a lending protocol (Aave, Compound, MakerDAO) involves depositing tokens and receiving an interest-bearing token in return (e.g., aUSDC, cDAI).

The disposal question: HMRC's 2024 guidance confirmed that whether the deposit into a lending protocol constitutes a disposal depends on whether "beneficial ownership" of the deposited tokens passes to the protocol. For protocols that take legal title to the deposited assets and are not obligated to return the same specific tokens (only an equivalent amount), HMRC takes the view that a disposal has occurred.

The interest/yield question: The yield received from the lending protocol — whether in the form of accumulated interest-bearing tokens or periodic token receipts — is income. For individuals, this is likely miscellaneous income. For businesses, it would be trading income or loan relationship income depending on the structure.

Impermanent Loss

Impermanent loss (IL) arises when tokens deposited in an automated market maker (AMM) liquidity pool change in relative value, resulting in the LP position being worth less than simply holding the tokens would have been worth. IL is "realised" when the LP position is closed (tokens withdrawn).

HMRC has not published definitive guidance on the tax treatment of impermanent loss. The logical analysis:

• If depositing into the LP is a disposal (creating a new asset — the LP position)
• And withdrawing from the LP is a disposal of the LP position
• Then the loss on the LP position (if the LP is worth less than the cost of the initial deposit) is a CGT loss

However, if the initial deposit was not a disposal, the IL question is more complex — the loss may be embedded in the continued holding of the underlying tokens.

Wrapping and Unwrapping Tokens

Wrapping involves converting a token to a wrapped version for use across different blockchain protocols (e.g., ETH → WETH for use on protocols that only accept ERC-20 tokens). HMRC's 2024 guidance confirmed that wrapping and unwrapping where the wrapped token represents an identical economic interest to the original token — with no change in rights or governance — is not a disposal. The wrapped token inherits the original token's base cost.

This is a pragmatic concession by HMRC that reflects the technical reality of wrapping as a bridge operation rather than an economic transaction.

HPT Group advises DeFi participants, protocol developers, and crypto businesses on the UK tax analysis of complex DeFi transactions. Given the rapidly evolving nature of both the technology and HMRC's guidance, maintaining a contemporaneous transaction record — and taking advice before implementing complex DeFi strategies rather than attempting reconstruction retrospectively — is essential. Contact our crypto tax team or apply for an initial DeFi tax review.