Crypto Lending Taxes: Ultimate Tax Guide for 2024 [HMRC Rules]

Crypto loans and interest lead to taxes in the UK, but each protocol is different in the eyes of the HMRC. Discover how crypto lending taxes work, the taxation of crypto loans, the tax benefits available for investors, UK crypto taxes, and more!

What is Crypto Lending & How Does It Work?

Crypto lending protocols allow users to lock funds in various investment vehicles and earn interest as a reward in the form of cryptocurrency. Users can also borrow crypto and pay interest on those loans. Decentralized Finance (DeFi) has simplified the experience of accessing these features, with several protocols targeting different use cases, including Maker, AAVE, and Compound Finance.

Crypto Lending Taxes – How Interest Income is Taxed

>Crypto lending taxes are highly dependent on the nature of the transactions between the user and the protocol. As a general rule, if a lender receives a return for providing tokens that qualifies as income, it will be taxed under income tax laws. However, if this return is classified as a disposal, it would be treated as a capital gain or loss. Understanding the different types of crypto lending protocols and their operations is essential to determine the applicable taxes.

Holding Period on Crypto Lending

If your activities on crypto lending protocols lead to disposals, falling under capital gains taxes, your holding period could be important if there were tax distinctions between long-term and short-term trades. However, in the UK, there are no distinctions in the capital gains tax rates for long-term or short-term transactions.

Tax-free Allowances for Crypto Loans Income

If your activities with crypto loans have the nature of income, you could use your income tax-free allowance on that income. In the UK, for the 24/25 year, the income tax-free allowance is £12,570. If your income from crypto lending and other activities does not cross that threshold, you wouldn’t have to pay any income taxes.

Capital Gains Tax on Crypto Loans in the UK

Under the new DeFi regulations in the UK, providing crypto loans (lender) can be considered a disposal of crypto, subject to capital gains taxes. When you receive back the amount of crypto you loaned, that is considered an acquisition. However, the return (interest) you receive from providing a loan is usually seen as income and should be added to your total revenue for the year. Please keep in mind that depending on the protocol, the type of taxes may change for these transactions, as DeFi is still a gray area in the UK.

In the case of a lender, the capital gains tax rate on the loan will depend on your income tax bracket. If you’re the borrower of a loan, its cost basis is the amount you receive, while the amount you return is the sales proceeds, with the transaction falling under capital gains taxes. However, any loan interest payments can be considered allowable expenses in the UK, enabling you to save on crypto taxes.

How is Crypto Lending Tax Calculated in the UK?

Every time you receive crypto interest, you have to determine its Fair Market Value (in GBP) at that time. That amount will be added to your income for the tax year and taxed according to your income bracket. With disposals (e.g., crypto loans), you have to deduct the cost basis from the total sales proceeds to determine the gain/loss of the transaction. When you provide a crypto loan, that amount is the sales proceeds. The cost basis is the amount you spent to acquire that crypto (including fees) according to the UK cost basis method.

Crypto Lending Taxes in Other Countries

US

Earning interest in the form of cryptocurrency in the US leads to income taxes when you receive those rewards, while receiving a crypto loan is tax-free (as a FIAT loan). Discover more about crypto taxes in the US.

Canada

In Canada, events like receiving staking rewards or interest from other vehicles are taxed according to your federal income tax bracket. Discover how Canada taxes cryptocurrencies.

Australia

In Australia, receiving crypto interest leads to income taxes. You need to determine the Fair Market Value (FMV) of the amount of crypto you receive and report it. Discover how to calculate your income taxes in our Australia crypto tax guide.

Conclusion – Crypto lending taxes in the UK

The taxation of crypto interest and loans in the UK is not straightforward despite the latest clarifications by the HMRC. Investors need to pay close attention to the interest they receive and the loans they provide to determine which taxes result from those operations. Tracking these transactions with the help of crypto tax software is the first step to complying with changing regulations and gray areas like DeFi. CoinTracking is fully equipped with the features to track your crypto portfolio, determine gains and income, and generate tax reports for the UK.

Disclaimer

Note: This article is for informational purposes only and does not constitute financial or tax advice. Always consult with a professional before making any decisions.