Draft legislation – not yet law. Position reviewed 30 July 2026.
The UK government has announced changes to the Capital Gains Tax treatment of certain cryptoasset lending and liquidity pool transactions.
HMRC published a policy paper and draft Finance Bill 2026-27 legislation on 13 July 2026. The measure will introduce no gain, no loss treatment for certain disposals involving qualifying cryptoasset loans and liquidity pools.
HMRC says the change will effectively defer Capital Gains Tax until an economic disposal of the cryptoasset.
The measure is due to take effect from 6 April 2027.
The legislation remains in draft and must go through the legislative process. However, the government has announced the measure and published detailed draft rules with an intended start date of 6 April 2027.
Importantly, the new treatment does not generally apply retrospectively. Historic cryptoasset lending and liquidity pool transactions still need to be considered under the rules that applied at the time.
Why are the crypto lending and liquidity pool tax rules changing?
The current UK tax rules can create unexpected Capital Gains Tax consequences for cryptoasset lending and liquidity pool transactions.
A key issue is beneficial ownership.
Beneficial ownership broadly concerns who has the underlying rights and benefits attached to an asset. For cryptoasset lending and liquidity pool arrangements, HMRC considers the terms and conditions to establish whether an investor has transferred beneficial ownership of their cryptoassets.
HMRC says that where the recipient can deal with the cryptoassets as they wish, this strongly indicates that beneficial ownership has transferred.
Where an investor transfers beneficial ownership to a borrower or DeFi platform, HMRC treats the transaction as a disposal for Capital Gains Tax purposes.
This can create a tax disposal even though the investor has not sold their cryptoassets for pounds. They may lend tokens through a platform and expect to receive equivalent tokens back, but a disposal can still arise when they enter the arrangement.
Following concerns about the administrative burden of this treatment, the government consulted on changing the rules.
HMRC says the new measure aims to align the tax treatment more closely with the economics of cryptoasset loans and liquidity pools. Gains and losses should generally arise when an investor makes an economic disposal of the cryptoassets.
What will change from 6 April 2027?
The draft legislation introduces Capital Gains Tax rules for three types of arrangement:
- Single cryptoasset lending arrangements.
- Single cryptoasset borrowing arrangements.
- Automated market making arrangements.
The rules apply to individuals and trustees and cover defined qualifying cryptoassets. The draft legislation excludes securities and certain tokenised assets from the definition of a qualifying cryptoasset.
A key part of the new rules is no gain, no loss treatment.
This does not make a gain tax free. Instead, the treatment can preserve the tax history of the cryptoassets and defer the gain or loss until a later transaction.
New rules for cryptoasset lending
The first change covers qualifying single cryptoasset lending arrangements.
Broadly, the investor must have a right to become unconditionally entitled to cryptoassets of the same type as those invested and a return.
The arrangement must be economically equivalent to lending, form part of a genuine commercial arrangement and meet a low-risk-of-loss condition. It must also satisfy an unconnected parties or widely available condition.
Where the rules apply, qualifying cryptoassets transferred in exchange for an interest in the lending arrangement can receive no gain, no loss treatment.
The same treatment can also apply when the investor disposes of the lending interest and receives qualifying cryptoassets of the same type, subject to the detailed conditions.
HMRC’s crypto lending example
During the consultation process, HMRC illustrated the intended approach using four steps:
Step 1: An individual buys some tokens.
Step 2: The individual lends the tokens through a cryptoasset platform.
Step 3: The individual receives equivalent tokens back.
Step 4: The individual sells the tokens.
The original purchase remains an acquisition for Capital Gains Tax purposes.
Under HMRC’s example, the lending and return of equivalent tokens receive no gain, no loss treatment. The later sale remains a disposal.
The final gain or loss therefore reflects the difference between the sale proceeds and the original acquisition cost.
In simple terms, the lending arrangement does not create an additional gain or loss simply because the investor lends qualifying tokens and later receives equivalent tokens back.
Will all crypto lending qualify?
No.
This is not a blanket rule for every transaction described as DeFi lending.
The arrangement must meet the statutory conditions, including the economic lending, commercial arrangement and relevant risk and availability or connection tests.
Investors and advisers will still need to understand how the arrangement operates. A platform calling a product “lending” will not determine the UK tax treatment by itself.
New Capital Gains Tax rules for crypto borrowing
The draft legislation also introduces rules for qualifying cryptoasset borrowing arrangements.
The borrower will generally be treated as acquiring borrowed qualifying cryptoassets at market value when they receive them.
When the borrower transfers cryptoassets of the same type back to the lender, the rules generally treat the borrower as disposing of those cryptoassets for the original acquisition value.
The draft legislation also addresses collateral. Disposals and acquisitions relating to assets provided as collateral under a qualifying borrowing arrangement are generally disregarded for Capital Gains Tax purposes.
If it becomes apparent that some or all of the collateral will not return to the borrower, the borrower is instead treated as disposing of those assets at market value at that time.
HMRC’s crypto borrowing example
HMRC gives an example involving an individual who borrows 100,000 USDC and provides 1 Bitcoin as collateral.
Important: this example appeared in HMRC’s earlier consultation response and illustrates the design proposed at that stage. Under the July 2026 draft legislation, the borrower treatment does not apply where the borrowed cryptoassets are eligible stablecoins at the time of transfer. The example does not confirm that USDC will meet the final eligibility conditions or that the £5,000 result will apply under the combined draft rules.
The individual immediately sells the USDC for £80,000 and later pays £75,000 to acquire 100,000 USDC to repay the loan.
HMRC’s example produces a £5,000 chargeable gain.
This reflects the difference between the £80,000 received from selling the borrowed USDC and the £75,000 cost of acquiring the USDC used to repay the loan.
The provision of the Bitcoin collateral is disregarded for Capital Gains Tax purposes in HMRC’s example.
New Capital Gains Tax rules for liquidity pools
The third major change covers automated market making arrangements, or AMMs.
The draft legislation sets specific conditions. The arrangement must involve at least two types of cryptoasset, operate through a smart contract and use an automated protocol to set prices by reference to the cryptoassets held within a liquidity pool.
The arrangement must also meet genuine commercial and widely available conditions.
Where an investor transfers qualifying cryptoassets into a qualifying AMM arrangement in exchange for an interest, the disposal of those cryptoassets can take place on a no gain, no loss basis.
The rules then consider the cryptoassets received when the investor disposes of their interest.
Where the investor receives cryptoassets of the same type and within the relevant quantity, no gain, no loss treatment can apply to the qualifying part of the transaction.
Where the quantities change, a gain or loss can arise by reference to the difference.
HMRC’s liquidity pool example
HMRC illustrated the approach using an individual who introduces:
- 3 ETH with a base cost of £9,000
- 12,000 USDC with a base cost of £8,000
The individual receives 36 liquidity tokens, with a total base cost of £17,000.
They later use 18 of the 36 liquidity tokens to make a partial withdrawal and receive:
- 1.2 ETH
- 7,500 USDC
At the time, each USDC is worth £1.40.
As the individual uses half of their liquidity tokens, HMRC apportions the original quantities by 50%. The relevant quantities are therefore 1.5 ETH and 6,000 USDC.
The individual receives 0.3 fewer ETH and 1,500 additional USDC.
HMRC calculates a £900 loss on the ETH and a £2,100 gain on the additional USDC.
The overall result is a net gain of £1,200.
This demonstrates an important limitation. The new rules will not make every liquidity pool deposit and withdrawal no gain, no loss. Changes in the quantities represented by an investor’s position can still create gains or losses.
What about DeFi rewards and income?
The new measure focuses on Capital Gains Tax and certain disposals involving cryptoasset loans and liquidity pools.
It does not make DeFi rewards tax free.
HMRC’s public guidance says that where an individual receives tokens from lending, including DeFi, and does not carry on a trade, HMRC treats the tokens as other taxable income.
However, HMRC’s detailed Cryptoassets Manual says the nature of a return depends on how the transaction is structured. A return may have the nature of revenue or capital, with several factors relevant to the analysis.
The new Capital Gains Tax rules therefore do not remove the need to consider returns or rewards separately.
The changes are not generally retrospective
The measure is due to take effect from 6 April 2027.
For single cryptoasset borrowing arrangements, the draft commencement provisions apply where the lender transfers qualifying cryptoassets to the borrower on or after 6 April 2027.
For the other rules, the draft legislation applies to transactions occurring on or after that date.
Investors cannot simply apply the new no gain, no loss treatment to historic transactions.
Transactions in 2024-25, 2025-26 and 2026-27 still need to be reviewed under the tax rules applying at the time.
Under HMRC’s current guidance, a historic transfer of beneficial ownership to a borrower or DeFi platform can create a Capital Gains Tax disposal. The announcement of new rules from April 2027 does not generally remove that disposal.
The draft legislation contains transitional provisions for certain lending and AMM interests acquired before 6 April 2027. These deal with how some existing positions enter the new regime rather than providing a general retrospective no gain, no loss treatment.
Anyone with an open lending or liquidity pool position spanning 6 April 2027 may therefore need to consider the transitional rules.
Are the new DeFi tax rules final?
The government announced the measure on 13 July 2026, and HMRC states that it will have effect from 6 April 2027.
However, the legislation remains in draft.
The draft Finance Bill 2026-27 clauses are open for technical consultation until 7 September 2026 and must go through the legislative process.
It would therefore be wrong to say that the law has already changed.
The current position is that the government has announced the measure, published draft legislation and set an intended operative date of 6 April 2027.
Final thoughts
The changes should bring the Capital Gains Tax treatment of qualifying cryptoasset lending and liquidity pool arrangements closer to their economic reality.
However, the detail still matters. Not every arrangement will qualify, changes within an automated market maker can still create gains or losses, and DeFi returns may need a separate tax analysis.
The timing is equally important. The new rules are due to apply from 6 April 2027 and do not generally rewrite the treatment of historic transactions.
The legislation remains in draft, and I will be watching for any changes as it moves through the legislative process and further HMRC guidance becomes available.
If you have used cryptoasset lending platforms or liquidity pools and are unsure how your transactions should be reported, get in touch or speak to a tax adviser who understands cryptoassets and the UK tax rules.
This article is for general information only and is not personal tax advice. Tax treatment depends on the facts and the law in force. See the website disclaimer.
