Introduction
DeFi (Decentralised Finance) continues to grow in the UK in 2025 as more people use staking, lending, yield farming and liquidity pools to build passive income. With this growth comes the need to understand how the UK tax authority, HMRC, treats these activities. Many investors still assume that DeFi is too new to be taxed. In reality, HMRC has clear guidance and is tightening its approach.
The government also released new proposals after the 27 November 2025 Budget. These proposals aim to simplify the rules, although they are not yet law. This guide explains the current rules and the possible changes, and it shows beginners how to stay compliant with the help of automated tools designed for Crypto UK Taxes.
What HMRC Considers to be DeFi For Crypto UK Taxes
“DeFi” covers any crypto activity that goes beyond holding tokens. HMRC typically includes the following:
Lending
You provide crypto to a protocol or platform and receive interest or rewards. You usually retain exposure to the underlying crypto while letting the platform use your tokens in a pool.
Borrowing
You lock up crypto as collateral in order to borrow another asset. If the value of your collateral changes, you may gain or lose capital. Interest paid on the loan is generally not deductible for tax purposes unless you are running a trade.
Staking
You lock your tokens to help secure a blockchain network. In return you may receive staking rewards which HMRC often treats as income when you become economically entitled to the tokens.
Liquidity Pools
You deposit pairs of assets into an automated market maker. In return you receive liquidity pool tokens which represent your share. When you add or remove liquidity you usually create a disposal for capital gains purposes.
Yield Farming
You stake liquidity pool tokens or other assets in external contracts in order to earn additional incentives. These rewards are normally treated as taxable income.
Understanding these basic categories is essential because every DeFi activity can potentially create a taxable event.
If you do any of the above, HMRC will consider you to be participating in DeFi.
How the UK Taxes DeFi Activities
UK taxation of DeFi uses a combination of capital gains tax and income tax depending on the type of transaction.
1. Capital Gains Tax (CGT)
Capital gains apply when you dispose of a crypto asset. The types of disposals include selling your crypto, swapping one token for another, spending crypto on goods or services or gifting crypto to someone other than your spouse. When you enter or exit a liquidity pool, this is often treated as a disposal because you hand over one asset and receive another. This means you must calculate the gain or loss on each step.
2. Income Tax on Rewards
Rewards such as interest, staking income and yield farming incentives are usually taxed as income when you become entitled to receive them. You use the fair market value of the rewards in pounds on the day you receive them. Later, when you sell these rewards, you pay capital gains tax on any increase in value from that point forward. Beginners often misunderstand this because it means the same token can trigger both income tax and capital gains tax at different times.
3. When Rewards Can Be Treated as Capital Instead of Income
HMRC sometimes allows rewards to be taxed as capital when they simply represent a return of your own capital rather than something new. This area is more complex and depends on how the protocol works. For beginners, the main principle is that new tokens or newly created economic value are income. Anything that represents redistribution of your existing value is more likely to fall under capital gains.
4. Gas Fees and Allowable Costs
Gas fees can sometimes be added to your acquisition cost or deducted from your disposal proceeds. This can reduce your eventual gain. Gas fees cannot be used as a deduction from income unless they relate directly to receiving the income.
Proposed Changes Following the 27 November 2025 UK Budget
The government announced proposed changes aimed at improving the way DeFi is taxed. These proposals would create a new approach.
• Moving tokens into DeFi protocols would be treated as a “no gain, no loss” transaction. This means that simply depositing tokens into a protocol would not count as a disposal.
• Tax would apply only when there is a genuine economic disposal. For example, tax would apply when you withdraw tokens and sell them, or exchange them for another asset.
• Rewards received from DeFi protocols would continue to be taxed as income at the time of receipt.
These proposals aim to remove the confusion around token transfers that currently count as disposals, even when your economic ownership remains unchanged.
Important note. These rules are not yet in force. They remain proposals and may be amended before legislation is finalised. Current HMRC guidance remains the law for now.
Common Mistakes Beginners Make With Reporting DeFi Income
Many investors make avoidable mistakes when reporting DeFi activity. You can stay compliant by understanding these pitfalls.
Mistake 1: Forgetting to track every transaction
DeFi often involves many small transactions and wallet interactions. Each one may trigger a taxable event. Missing even a few entries can distort your tax return.
Mistake 2: Misclassifying rewards
Some rewards are income and others are capital. Incorrect classification is one of the most common errors HMRC sees from new investors.
Mistake 3: Not understanding the timing of taxable events
Income is taxed when you become entitled to receive the reward rather than when you withdraw it. This catches out many beginners.
Mistake 4: Using spreadsheets for high volume activity
Manual spreadsheets can become unmanageable. They are also prone to errors and make HMRC reviews more difficult.
How to Track and Calculate Crypto UK Taxes Easily
Tracking and calculating your taxes via manual spreadsheets can become a complex nightmare, especially if you use multiple wallets, exchanges, chains and or protocols. This is where automated crypto tax software becomes essential and why we recommend Koinly, one of the most widely used tools in the UK.
Koinly helps by:
• Importing data from exchanges, wallets and DeFi platforms
• Automatically classifying rewards, swaps, deposits and withdrawals
• Calculating income tax and capital gains tax under UK rules
• Providing accurate cost basis and pooled acquisition data
• Generating HMRC compliant reports in minutes
If you want to simplify your Crypto tax reporting, you can sign up through my affiliate link which supports the blog at no extra cost to you. 👉 Sign-up to Koinly.
Step by Step Guide to Using koinly For Crypto UK Taxes
1. Connect Your Wallets
Capture every transaction by connecting all wallets and exchanges to Koinly.
2. Review Your Classifications
Check how Koinly has categorised your transactions. Adjust them if needed so that rewards and disposals are accurate.
3. Check Your Gains and Income
Download a preview of your gains and income report. This gives you a clear picture of your tax position.
4. Submit Your Tax Return
Use the Koinly tax summary to complete your Self Assessment return. You can also share the reports with your accountant.
5. Save Your Records
Keep a copy of your reports and transaction history in case HMRC requests more information.
Conclusion
DeFi offers powerful opportunities for passive income and long term wealth growth. These opportunities come with responsibilities. Staking rewards and other returns are treated as income and disposals trigger capital gains. New proposals from the 27 November 2025 Budget may simplify some parts of the system, although the rules have not yet changed.
Beginners can stay compliant by keeping accurate records and using a tool such as Koinly. With the right approach you can participate in DeFi with confidence and without surprises at tax time.