CRYPTO61411 – Decentralized Finance: Lending and Staking: Corporation Tax: Making a DeFi Loan: Introduction – HMRC Internal Handbook

As explained in CRYPTO61130, a lender/liquidity provider can earn a return from decentralized finance (DeFi) lending activity. This refund may be subject to corporation tax for customers covered by the scheme. The corporate tax treatment of the return received by the lender/liquidity provider will depend, in part, on whether the client’s activities constitute a transaction.

Relevant considerations in determining whether an incorporated entity has a trade involving the provision of DeFi loans would be similar to those taken to determine whether there is a trade in stocks, securities, and other financial products. For more tips, see CRYPTO40150 and BIM56800.

Processing in the event of the exercise of a commercial activity

If a client is deemed to be carrying on a business activity involving the granting of DeFi loans, the activity which falls within the scope of this business activity will be subject to corporation tax under Article 35 of the Law on 2009 corporation tax (“CTA 2009”) .

If there is a transaction involving crypto-assets, these assets can potentially be held either as trading shares or as investment assets outside of the transaction. It will need to be determined if there have been credits to or from the commercial stocks. For more information on credits to and from commercial inventory, see BIM33630.

Treatment when a trade is not exercised

If a transaction is not performed by the client, or if the activity that generates the return does not fall under any transaction, then the granting of a DeFi loan may result in the disposal of a taxable asset (see CRYPTO61600). Where this is the case there may be a taxable gain subject to corporation tax under Section 2 CTA 2009.

However, the lender/liquidity provider may receive a return in exchange for the DeFi loan. If not part of the customer’s trade, this return may be charged as miscellaneous income under Section 979 CTA 2009.

The CRYPTO61412-CRYPTO61414 guidance pages will cover cases where the return can be charged as miscellaneous income.