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Decentralised finance (DeFi) allows crypto holders to earn returns in many different ways, including staking, lending, yield farming, and providing liquidity. From a UK tax perspective, these activities are often misunderstood, particularly because tax can arise before any cash is withdrawn.
This guide explains how HMRC treats DeFi-related activity for UK resident individuals in the 2025–2026 tax year. It focuses on:
- When DeFi returns are taxed as income
- When DeFi activity creates a capital disposal
- How staking, lending, and liquidity pools are treated in practice
- How timing affects both Income Tax and Capital Gains Tax
Where treatment depends on facts or is expected to change, this is stated clearly.
HMRC’s General Approach to DeFi
HMRC does not have a single, bespoke set of “DeFi tax rules”. Instead, it applies existing UK tax principles to crypto-based activity.
In practice, HMRC looks at:
- Whether you have received new tokens
- Whether you have disposed of existing tokens
- Whether beneficial ownership has changed
- Whether returns arise from holding capital or from participation or activity
The labels used by protocols (“staking”, “yield”, “rewards”) are not decisive. The tax treatment follows what actually happens on-chain.
Staking
How HMRC Treats Staking Rewards
Staking rewards are generally taxed as income, not capital.
HMRC treats staking rewards as miscellaneous income, because they arise from participation in a network rather than from selling an asset.
The £1,000 Trading and Miscellaneous Income Allowance
An important lower limit applies. If your total gross income from staking rewards, small-scale mining, and other miscellaneous crypto income is £1,000 or less in the tax year:
- No Income Tax is due
- The income does not need to be reported (unless you file for other reasons)
If the total exceeds £1,000, the full amount becomes taxable (not just the excess).
When Income Tax Arises
Income Tax arises when staking rewards are received and available to you.
The taxable amount is the GBP value at the moment the reward hits your wallet. That amount is added to your other income and taxed at your marginal income tax rate (20%, 40%, or 45%).
What Happens When Staking Tokens Are Sold
When staking rewards are later sold or swapped, Capital Gains Tax (CGT) may apply. The acquisition cost is the value already taxed as income.
CGT still applies when reward tokens are later disposed of
For 2025–2026, the later disposal of a staking reward is taxed using the settled crypto CGT rates:
- 18% within the unused basic rate band
- 24% above that band
Example: Staking Timeline
Step 1: Receipt (Income)
- Reward received in June 2025
- Value: £500
- Tax: £500 taxed as miscellaneous income
Step 3: Disposal (CGT)
- Token sold in February 2026
- Sold for: £800
- Tax: £300 capital gain (taxed at 18% or 24% depending on your band)
Liquid Staking (ETH → stETH)
This is one of the most common DeFi tax traps.
When you stake ETH via a protocol like Lido and receive stETH, HMRC treats this as a disposal.
You have disposed of ETH and acquired a new asset (stETH). This triggers a Capital Gains Tax calculation at market value.
Even though the economic exposure feels similar, ETH and stETH are different assets with different rights. This often surprises users who believe they are simply “locking” ETH.
Yield Farming
How HMRC Views Yield Farming
Yield farming typically involves depositing tokens and receiving incentive tokens, fees, or rewards.
Each component must be analysed separately. In most cases, reward or incentive tokens received as part of yield farming are treated as income, taxed when received at their GBP value.
Fees and Costs
Gas fees paid to enter or exit protocols are generally allowable costs for CGT purposes. They do not reduce income tax on rewards received.
Example: Yield Farming Rewards
What happens
Governance tokens received as incentives with a value of £900.
Tax Position
- £900 taxed as miscellaneous income
- Later sale may trigger CGT on any increase in value
DeFi Lending
Lending and Receipt Tokens (The “aToken” Trap)
Some lending protocols issue receipt tokens, such as aTokens (Aave) or cTokens (Compound).
When you lend assets and receive one of these tokens, HMRC may treat this as a disposal of the original token and an acquisition of a new asset.
This can trigger a Capital Gains Tax event at the point the lending position is opened.
Liquidity Pools
Current Treatment (2025–2026)
Under current rules, providing liquidity to AMMs typically involves depositing tokens and receiving an LP token.
HMRC treats this as a crypto-to-crypto exchange.
- Original tokens are disposed of
- LP token is acquired at market value
- CGT may arise at entry
When liquidity is removed, the LP token is disposed of, and underlying tokens are re-acquired with a new cost basis.
The “No Gain, No Loss” (NGNL) Update
HMRC has confirmed that it is moving toward a No Gain, No Loss model for DeFi lending and liquidity provision.
Under this future approach, entering and exiting these arrangements would not be treated as disposals. However, these rules are not yet law for the 2025–2026 tax year.
Taxpayers must still follow the current disposal-based treatment.
Reporting and Compliance
- Capital Gains Reporting
- For 2025–26 returns, use the dedicated crypto section on the SA108 form. If total disposal proceeds exceed £50,000, reporting is mandatory even if gains are below £3,000.
- Income Reporting
- DeFi income is reported as miscellaneous income. The £1,000 allowance applies to total gross miscellaneous income.
Common Misunderstandings
- “DeFi rewards aren’t taxed until I cash out”
- Income tax usually arises at receipt.
- “Liquid staking isn’t a disposal”
- ETH → stETH is treated as a crypto-to-crypto swap.
- “Small staking rewards don’t matter”
- They may be covered by the £1,000 allowance, but totals matter.
- “Liquidity tax rules are settled”
- Current rules apply, but change is expected.
Summary
- Staking and DeFi rewards are usually taxed as miscellaneous income
- The £1,000 income allowance can fully shelter small-scale activity
- Income tax is due at receipt; CGT applies when tokens are later disposed of
- For 2025–2026, crypto gains are taxed at 18% or 24%
- Liquid staking (e.g. ETH → stETH) is a taxable disposal
- LP tokens and receipt tokens usually trigger CGT under current rules
- HMRC is moving toward a No Gain, No Loss model, but it does not yet apply
For DeFi, understanding when income arises and when disposals occur is essential to reporting activity correctly under UK tax rules.
Unsure if your DeFi activity is taxable?
BlockBooks can analyse your on-chain activity to identify taxable income and disposals automatically.