What the no gain, no loss rule means for crypto lending and liquidity pools

The change in plain terms

If you lend cryptoassets or supply them to a liquidity pool, the tax treatment is about to get a lot more sensible. HMRC has published draft legislation that, from 6 April 2027, will treat qualifying cryptoasset lending and liquidity pool transactions on a no gain, no loss basis for Capital Gains Tax. The change amends the Taxation of Chargeable Gains Act 1992 and is set out in the government's cryptoasset loans and liquidity pools draft legislation.

In practice, that means the act of moving your tokens into a qualifying arrangement will no longer, by itself, create a taxable disposal. The Capital Gains Tax point is pushed back to when you actually dispose of the assets in economic terms. For anyone who has looked at their DeFi activity and worried about a tax charge on money they never received, this is genuinely good news.

There is a catch worth stating up front, and I will come back to it: this is a deferral of the charge, not an exemption from it. The tax does not disappear. It waits.

Why the current treatment causes a problem

To see why the change matters, it helps to understand the position we are leaving behind. HMRC published guidance in 2022 on how the existing Capital Gains Tax rules apply to cryptoasset lending and liquidity pools.

Under that guidance, and depending on the legal terms of the arrangement, transferring cryptoassets to a lending platform or a liquidity pool can amount to a disposal for Capital Gains Tax. That can be the case even though you have not sold anything for cash and still have an economic interest in the tokens. The result is awkward: you can face a Capital Gains Tax calculation when you enter an arrangement, and then further calculations when you withdraw or otherwise deal with the assets, on gains you have not actually realised in any ordinary sense.

Enough people said this was disproportionate that HMRC listened. A call for evidence in 2022 was followed by a consultation between 27 April and 22 June 2023, and the proposed legislation is the outcome. The stated aim is to align the tax treatment more closely with the economic substance of what is happening, which is the sort of change that makes a practitioner nod rather than reach for the caveats.

What no gain, no loss actually means

No gain, no loss is a familiar mechanism in Capital Gains Tax, and it does what the name suggests. A qualifying transaction does not crystallise a taxable gain or an allowable loss at the time it happens.

Instead, the existing tax cost of your cryptoassets is carried forward. The gain or loss is recognised later, when a transaction represents a genuine economic disposal. So the base cost you started with follows the assets through the arrangement, and the reckoning comes when you finally step out of it for real value.

This is why the point about deferral matters. You are not being handed a tax-free status. You are being spared the artificial charges in the middle, and asked to account properly at the end. That is a fair trade, and it removes a lot of noise, but it does not remove the obligation to keep track of your original costs and your transactions.

The three arrangements the rules cover

The draft legislation deals with three broad categories. The detail differs, so it is worth knowing which one you are in.

• Single cryptoasset lending. You transfer qualifying cryptoassets and receive a right to the return of the same type of asset, together with an economic return. Where the conditions are met, acquiring or disposing of your interest in the arrangement in exchange for cryptoassets of the same type you put in is treated as no gain, no loss.
• Single cryptoasset borrowing. Where you borrow qualifying cryptoassets, the borrowed assets are treated as acquired at market value at the time of borrowing. When you return assets of the same type, they are treated as disposed of for that same amount. Collateral you provide under the borrowing arrangement is disregarded for Capital Gains Tax under the proposed rules.
• Automated market maker and liquidity pool arrangements. These are the smart-contract arrangements where you supply two or more types of qualifying cryptoasset to an automated market maker. Moving assets into a qualifying arrangement can receive no gain, no loss treatment, and the same can apply when you surrender your interest and take back cryptoassets of the same type and quantity you invested. Where the quantity you get back differs from the quantity you put in, a gain or loss can arise by reference to that difference.

That last point on liquidity pools is the one to watch. The clean no gain, no loss result depends on getting back the same quantity. When the maths of the pool returns you more or less than you supplied, that difference is where a chargeable gain or loss can still appear.

Who is affected, and who is not

HMRC has directed the measure at individuals and trustees who enter into these cryptoasset loan and liquidity pool arrangements, and estimates that around 700,000 people could be affected. The intention is a framework that is easier to understand and apply, and the published measure does not set out an administrative burden on businesses or civil society organisations.

One distinction is easy to miss. The policy concerns the Capital Gains Tax position of individuals and trustees. If you invest through a company, the company's tax position is a different question, and you should take advice on its own circumstances rather than assume the same treatment applies. It is exactly the kind of detail where a quick check now saves an awkward conversation later, and if your holdings sit inside a structure it is worth reading this alongside how corporate residence and control are tested for any company you run from the UK.

What to do now

The change is welcome, but it does not take effect until 6 April 2027. Until then, your transactions still fall under the legislation and HMRC guidance in force today. So the practical advice is calm rather than dramatic: do not assume that moving tokens into a lending protocol or a liquidity pool is automatically tax-neutral yet, and do not let the good news ahead make you casual about the position now.

In my experience this is where things go wrong, and it is almost always about records rather than anything exotic. Whatever else you do, keep a clear trail of:

• the date and value of each cryptoasset acquisition;
• the number and type of tokens you transfer into an arrangement;
• the legal terms of the lending or liquidity arrangement;
• any tokens or other interests you receive in return;
• rewards, interest or other returns generated;
• the quantity and value of assets you withdraw; and
• the associated platform and transaction fees.

None of this needs to be alarming. It does need to be organised, and the work is mostly in keeping clean records before the deadline arrives. Get that right and the 2027 change will do its job quietly in the background.

A note if you are moving abroad

If you are an internationally mobile investor, two things sit alongside this change and are worth holding in view. First, deferring a Capital Gains Tax charge is not the same as escaping it, and the timing of any move and any later economic disposal interacts with the UK's residence and temporary non-residence rules, which have caught out more than one person who left and returned within five years. Second, the same holdings that this measure defers tax on are separately visible to HMRC through international reporting: our analysis of crypto reporting under CARF explains how that works and why the deferral does not put your activity out of sight.

The tax treatment is becoming more rational. The reporting around it is becoming more thorough. Both trends point the same way, which is that clean records and a clear plan are worth more now than they have ever been.

Frequently asked questions

When does the no gain, no loss treatment for crypto lending start?

The measure takes effect from 6 April 2027. Until that date, cryptoasset lending and liquidity pool transactions continue to be assessed under the legislation and HMRC guidance currently in force, so the current disposal treatment can still apply to what you do today.

Does no gain, no loss mean my crypto is tax-free?

No. No gain, no loss defers the Capital Gains Tax charge rather than removing it. Your original base cost carries forward and the gain or loss is measured when you make a later economic disposal. It spares you the artificial charges on entering and exiting an arrangement, not the tax on a real disposal.

What happens if I get back a different quantity from a liquidity pool?

The clean no gain, no loss result depends on receiving back the same quantity of the same type of cryptoasset you supplied. Where the quantity you receive differs from the quantity you provided, a gain or loss can arise by reference to that difference.

How are borrowed cryptoassets treated under the new rules?

Borrowed qualifying cryptoassets are treated as acquired at market value at the time of borrowing, and when you return assets of the same type they are treated as disposed of for that same amount. Collateral you provide under the borrowing arrangement is disregarded for Capital Gains Tax under the proposed rules.

Does this change apply if I invest through a company?

No. The measure concerns the Capital Gains Tax position of individuals and trustees. A company's position is a separate question, and if you hold cryptoassets through a company you should take advice based on the company's own circumstances rather than assume the same treatment applies.

What should I do before 6 April 2027?

Treat your current transactions under the rules in force today, and do not assume that depositing tokens into a protocol is already tax-neutral. The most useful thing you can do is keep complete records of acquisitions, transfers, returns, rewards and fees, so that the new treatment can be applied cleanly when it arrives.

Are staking and lending rewards still taxable?

The no gain, no loss treatment relates to Capital Gains Tax on qualifying transactions. It does not mean that every receipt, reward or return from a cryptoasset arrangement is free from tax. Rewards, interest and similar returns can be taxable in their own right, so they should be recorded and considered separately.

What records should I keep for crypto lending and liquidity pools?

Keep the date and value of each acquisition, the number and type of tokens moved into an arrangement, the legal terms of that arrangement, anything received in return, rewards or interest generated, the quantity and value of assets withdrawn, and the platform and transaction fees. Good records are what let you apply the rules correctly in either period.