Thread by @alpha_pls

1/ Crypto Twitter. The UK needs your help.

Two days ago, HMRC published new defi tax guidance, which if maintained can severely damage defi in the UK and punish all users.

We need to make some noise about this.

A thread 🧵👇

2/ Before we continue, I have to highlight that I’m not a tax specialist but have sought counsel from crypto natives and general accountants.

3/ The new defi guidance was published on Feb 2nd, two days after the tax deadline. Two days.

4/ The guidance has significant implications on the future of defi in this country and could set precedence for other countries to follow suit.

gov.uk/hmrc-internal-…

5/ Whilst it has to be laboured that this is guidance based on the ‘interpretation’ of UK Law, it is very likely that the majority of accountants would implore you to follow the rules laid out by HMRC so as to not put you at risk of a compliance check and tax penalties.

6/ The guidance specifically focuses on staking, lending and borrowing and could mean double to triple the amount of tax you’ve already paid if you’ve not strategized appropriately.

7/ @CryptoUK are a trade body that represent the UK digital asset sector, working with policy makers and market participants and put out the following statement on 2nd Feb:

https://twitter.com/cryptoukassoc/status/1488925192273416201?s=21

8/ So what does this mean? Having read through the guidance, there are numerous ambiguities but taking a conservative tax reporting approach would mean you are liable to pay capital gain taxes every time you stake, lend or borrow your crypto & this can be applied retroactively.

9/ The guidance stipulates that staking your crypto assets on any platform counts as a disposal of said asset, triggering a tax event; this is despite you not having given up custody of your asset.

10/ Let’s use a well-known example. @AaveAave is one of the largest lending and borrowing defi platforms in the space; and one of the most trusted.

11/ AAVE and @StaniKulechov, one of the revered OGs of defi, are based here in the UK and have created a protocol which has undoubtedly accelerated the growth of the space.

12/ AAVE provided the opportunity for thousands of crypto users to earn interest on their crypto assets and borrow against them in a trustless manner.

13/ The trustless bit is important. HMRC are arguing that by depositing your assets to AAVE you gave away ownership of these assets and therefore have to pay capital gains tax of up to 20%.

14/ AAVE is a permissionless, trustless protocol which is governed by immutable code. Depositing into AAVE doesn’t give up custody of your asset if you understand the architecture of the platform.

15/ Classifying these types of deposits will inevitably deter UK users from using defi platforms, as they will not want to trigger a taxable event.

16/ This would prevent future deposits and borrowing, both integral to the provision of liquidity in the whole ecosystem. TVL, collateralisation rates, APYs would therefore be affected, as the UK is a very large addressable market.

17/ Let’s also take a look at a staking platform.

18/ @HuxtableJonny, a fellow brit, is one of the founders of @linkpoolio. Based on this guidance, staking your LINK tokens, on platforms such as Linkpool, would amount to a disposal of your assets, despite you not having any gains to show for it.

19/ Platforms such as these and PoS platforms need these tokens to secure the network and grow, but the new guidance could stop future participants in the UK. Consequently, slowing down the growth of PoS networks.

20/ Let’s imagine a real world example:

Anon777 plucked up the courage to catch the falling knife during the March 2020 covid crash. Anon777 closed his eyes and put his entire life savings of $10,000 into $ETH at a cost of $100. Anon777 managed to purchase 100 ETH.

21/ Anon777 was so proud of himself and promised that he was never selling $ETH no matter what.

22/ Towards the end of 2021, Anon777 discovered Lido Finance. Anon777 thought it would be a good idea to earn some interest on his asset, considering he was never selling it. The price of $ETH at this moment in time was $4800.

23/ Anon777 staked all of his $ETH with @LidoFinance and received StETH in return and went about his business.

24/ On Feb 2 Anon777 received a message from a friend about HMRC defi guidance. Anon777 read the manual and realised he was suddenly in a lot of trouble.

25/ The price of ETH is now $2600. Anon777 did some quick maths and realises he owes around $86,000 dollars in tax despite not having sold a single ETH.

26/ Anon777 doesn’t have anywhere near this amount of money in the real world. And is starting to panic. At current prices Anon777 would have to sell 33% of his $ETH in order to pay that tax.

27/ He could wait it out and see if prices go back up, but what if prices drop further? He could have to capitulate much more of his ETH in order to pay a tax he didn’t realise he was incurring.

28/ Anon777 has become a forced seller because of the new guidelines by HMRC.

29/ We are all Anon777. Not only is this an incredibly stressful situation, as these rules can be applied retroactively for previous tax year, but it's also soul destroying for so many who might have managed to play their way out of a difficult hand they were dealt in life.

30/ Another contradiction from HMRC's new guidelines is that if you are the victim of a defi hack, they classify you as still having ownership of these assets and therefore you can not write off the losses incurred against your tax.

31/ But these new guidelines state that you disposed of your asset, so how can you still be the owner?

32/ There are significant inconsistencies compared to other assets here in the UK. Stock lending provides important liquidity to organisations and is not classed as a disposal of an asset.

33/ Generation X who made significant gains on stocks in the last 30-40 years can borrow against their assets and not be penalised…

34/ Whereas the chosen asset class for the millennials and gen z generations are penalised with capital gains tax and complicated tax process, if they choose to do exactly the same thing.

35/ Additionally, crypto lenders cannot write off losses from hacks against the tax incurred by them depositing into defi platforms. With defi being so nascent, smart contract risk is significant and this creates another huge deterrent for potential users.

36/ There is no sensible reason why crypto lending and stock lending should be any different. There are numerous comparative examples which accountants could further elaborate on.

37/ Other aggressive rules include the liquidation of collateral, LPing and lending cryptocurrency in various scenarios.

38/ This guidance could also do even more damage to the overall defi space. No one can become proficient with defi without using and experimenting with all of these dApps.

39/ Numerous gigabrain developers and Web2 lurkers may never go down the rabbit hole as a result, stifling the innovation in this country.

40/ Referring to defi, a very wise man once said, "This isn't going away."

41/ The UK are simply giving up an opportunity to be at the forefront of a financial revolution. And in a post-brexit world this will be an enormous missed opportunity when the country needs to attract investment more than ever.

42/ It has also come to our attention that HMRC did not consult with any figures or representative organisations in the crypto industry regarding this taxation.

https://twitter.com/crypjo091/status/1489253633552445447

43/ We understand you may not be based here in the UK. But it is in everyone’s interest to challenge this misplaced and poorly thought through taxation, as you could be next.

44/ If there are any crypto tax accountants reading this, many of us would benefit from a standardised letter that we can send to MPs. Please DM if you could help with that.

45/ This is not about followers, this is not about Twitter clout. This is about amplifying a message which can hopefully cause HMRC to re-examine this taxation with the help of the crypto industry.

46/ Please like and retweet this thread, convey your concerns to your local MPs and local news-sources.

47/ People who gravitate towards crypto tend to be those who welcome decentralisation and the creation of a fairer system. These new rules are designed to destroy defi in the UK and we must not go gently into that good night.

As individuals with big reach in this space, any support would be much appreciated: @cobie, @Pentosh1, @CryptoCred, @trader1sz, @twobitidiot, @RaoulGMI, @intocryptoverse, @KoroushAK, @HsakaTrades, @Cryptopathic, @loomdart.