DeFi Tax UK: How HMRC Taxes Liquidity Mining, Yield Farming and Lending

Every factual statement below is drawn from HMRC's published guidance on gov.uk and cited to it. The sources are listed in full at the end.

HMRC's Current Position on DeFi

HMRC's guidance on decentralised finance sits in the Cryptoassets Manual at CRYPTO61000, covering lending and staking for Income Tax, Corporation Tax and chargeable gains.

The test HMRC applies is beneficial ownership. Its guidance states that where making a loan or staking "results in the lender/liquidity provider transferring their beneficial ownership of the tokens", this "will give rise to a disposal of the loaned/staked tokens". It adds that "Where the recipient of the tokens has the ability to deal with the tokens received as they want then this will be a strong indicator that the recipient has acquired the beneficial ownership of those tokens" (CRYPTO61620).

A change is coming, but it is not in force yet. HMRC's policy paper on cryptoasset loans and liquidity pools states that the measure "will treat certain disposals involving cryptoasset loans and liquidity pools as being 'no gain, no loss' (NGNL), which effectively defers Capital Gains Tax until an economic disposal of the cryptoasset", and that "This measure will have effect from 6 April 2027" (Tax treatment of cryptoasset loans and liquidity pools). Everything described in this guide is the position that applies before that date.

Staking and Lending Rewards: Income, Not CGT

HMRC states that "Any cryptoasset exchange tokens (also known as cryptocurrency) you receive from employment, or from activities such as mining, staking or lending count as income" (Check if you need to pay tax when you receive cryptoassets).

The Cryptoassets Manual puts the same point with the valuation rule attached. Where the activity does not amount to a trade, "the pound sterling value (at the time of receipt) of any tokens awarded will be taxable as income (miscellaneous income)". Whether it is instead a trade "depends on a range of factors such as: degree of activity, organisation, risk, commerciality" (CRYPTO21200).

There is an allowance. HMRC states you can receive up to a "£1,000 allowance each tax year for trading and miscellaneous income" (Check if you need to pay tax when you receive cryptoassets).

Income Tax is charged at your marginal rate. For the current tax year the rates are 20% on income from "£12,571 to £50,270", 40% from "£50,271 to £125,140", and 45% "over £125,140", with a personal allowance of "Up to £12,570" (Income Tax rates and Personal Allowances). HMRC states separately: "You pay Scottish Income Tax if you live in Scotland", and Scottish rates and bands differ from the rest of the UK (Scottish Income Tax).

Selling the reward tokens later is a separate Capital Gains Tax event. Keep a record of every reward: the date, the number of tokens, and the sterling price on the day.

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Liquidity Provision and LP Tokens

When you deposit tokens into a liquidity pool you typically receive different tokens back, representing your share of the pool.

The beneficial ownership test decides the treatment. If the arrangement leaves the pool or protocol free to deal with the tokens you put in, HMRC's position is that beneficial ownership has passed and there is "a disposal of the loaned/staked tokens" (CRYPTO61620). Where beneficial ownership is retained throughout, there is no disposal at that point.

Withdrawing from the pool is assessed the same way, on what actually changes hands and who has the right to deal with it. Because pool ratios move as trades pass through, the tokens you take out may not match what you put in.

This is the friction the 2027 change is designed to remove. Until 6 April 2027, the existing analysis applies.

Collateral and Liquidation

HMRC addresses collateral directly. If the terms let the DeFi lending protocol deal with the collateral freely, that is "a strong indicator" that it "has acquired the beneficial ownership of those tokens". If it is restricted from dealing with the collateral, that is "a strong indicator" that it "has not acquired beneficial ownership" (CRYPTO61640).

That distinction sets what happens on liquidation. Where beneficial ownership passed when the collateral was provided, the borrower already made a disposal at that point, so the liquidation itself has no further chargeable gains consequence. Where the borrower kept beneficial ownership, section 26 TCGA 1992 treats the holder of the collateral as a nominee, so "any gain or loss on a disposal of the tokens held as collateral" is "deemed to be the gain or loss of the borrower", calculated at market value in sterling.

HMRC also states that tokens seized as a liquidation penalty are not an allowable expense under section 38 TCGA 1992.

Airdrops

HMRC's treatment of airdrops turns on whether you did something to get them.

Income Tax "may not apply if they're received: without doing anything in return (for example, not related to any service or other conditions) not as part of a trade or business involving cryptoasset exchange tokens or mining".

By contrast, "Airdrops that are provided in return for, or in expectation of, a service are subject to Income Tax either as: miscellaneous income receipts of an existing trade" (CRYPTO21250).

Either way, disposing of the tokens later can still produce a capital gain.

Record-Keeping for DeFi

Two valuation points follow directly from the guidance above and are worth stating plainly. Income is valued at "the pound sterling value (at the time of receipt)", and allowable cost is "the consideration (in pound sterling) originally paid for the asset" (CRYPTO22150). Sterling values at the time of each transaction are what HMRC works from, not a dollar figure converted at a year-end rate.

Pooling still applies underneath all of this. Each type of token needs its own pool, and NFTs "are separately identifiable and so are not pooled and no matching rules are applied" (CRYPTO22200).

Common Mistakes to Avoid

Assuming rewards are only taxable when sold. Staking and lending rewards are income at the point of receipt, valued in sterling on that day.

Treating a pool deposit as a non-event. Whether it is a disposal turns on beneficial ownership, not on whether you feel you still own the position.

Using dollar valuations. HMRC works in sterling at the time of each transaction.

Recording only the year-end total. Where rewards arrive continuously, HMRC's valuation rule is at the time of receipt, so the entries have to be tracked as they arise.

Mixing wallet addresses in your records. Keep records tied to each address.

For the capital gains rules that sit underneath all DeFi activity, see our main UK crypto tax guide.

Tools That Help

Three tools built around UK rules are commonly used for DeFi positions:

Koinly: connects to wallet addresses and imports on-chain history. koinly.io
Recap: UK-built, handles the section 104 pool and reward income. recap.io
BittyTax: open-source, licensed under AGPLv3, run from the command line. github.com/BittyTax/BittyTax

No tool decides the beneficial ownership question for you, and that is the question most DeFi classifications turn on. Treat any tool output as a starting point.

This guide is for general information only and does not constitute tax advice. Tax rules change and individual circumstances vary. Always consult a qualified tax adviser before making decisions about your tax position. Nothing on this website creates a professional relationship.

Sources

Last reviewed: 27 July 2026.

Quoted HMRC material contains public sector information licensed under the Open Government Licence v3.0.

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