How to Report DeFi Yield in the UK: Complete Tax Guide 2024

Understanding DeFi Yield and UK Tax Obligations

Decentralized Finance (DeFi) yield refers to rewards earned through crypto activities like staking, liquidity mining, lending, or yield farming. In the UK, HMRC treats most DeFi earnings as taxable income or capital gains. Unlike traditional savings, DeFi isn’t covered by Personal Savings Allowance, meaning all earnings must be reported. Failure to declare can result in penalties up to 100% of owed tax plus interest. With crypto transactions automatically reported to HMRC via exchanges under Common Reporting Standards, transparency is non-negotiable.

How HMRC Classifies DeFi Yield

HMRC categorizes DeFi yield based on activity type:

• Staking/Lending Rewards: Treated as miscellaneous income, taxed at 20%-45% based on your income tax band.
• Liquidity Pool Earnings: Typically considered income upon receipt, with additional capital gains tax when selling pooled tokens.
• Airdrops/Hard Forks: Taxable as income at market value when received if they result from active participation.
• Yield Token Appreciation: Gains from selling yield-bearing tokens incur 10%-20% Capital Gains Tax.

HMRC’s Cryptoassets Manual confirms DeFi isn’t “savings income,” so the £1,000 trading allowance doesn’t apply.

Step-by-Step Guide to Reporting DeFi Yield

1. Track All Transactions: Use blockchain explorers or tools like Koinly to log dates, amounts, and wallet addresses.
2. Convert to GBP: Calculate yield value using HMRC’s daily exchange rates at receipt time.
3. Categorize Earnings: Separate income-generating activities from capital disposals.
4. Complete Self Assessment: Report income in Box 17 (other income) and capital gains in the Capital Gains Tax section.
5. Calculate Tax: Apply income tax rates to yield earnings and CGT rates (10%/20%) to disposal profits.
6. Submit & Pay: File by January 31 following the tax year end. Pay owed tax simultaneously.

Essential Record-Keeping Requirements

HMRC requires 6 years of records including:

• Wallet addresses and transaction IDs
• Dates and times of yield receipt
• GBP value at time of receipt (screenshots accepted)
• Platform names and reward types
• Calculations for pooled asset disposals

Digital tools like Accointing or CryptoTaxCalculator can automate this process.

Common Reporting Mistakes to Avoid

• Ignoring Small Earnings: All yield must be reported regardless of amount.
• Misclassifying Income: Calling staking rewards “capital gains” to use CGT allowances.
• Forgetting Gas Fees: Transaction costs are deductible from income calculations.
• Using Incorrect Rates: Not applying HMRC’s official exchange rates.
• Omitting Reinvested Yield: Rewards compounded into new positions are still taxable upon receipt.

Tools for UK DeFi Tax Reporting

• Tax Software: Koinly (HMRC-compliant reports), CoinTracker
• HMRC Resources: Cryptoassets Manual, Exchange Rate Tool
• Portfolio Trackers: CoinGecko, Zerion for transaction history
• Accounting Templates: Free spreadsheets from UK crypto tax advisors

Frequently Asked Questions

Is DeFi yield taxed differently than bank interest?

Yes. Bank interest benefits from Personal Savings Allowance (£1,000 for basic-rate taxpayers). DeFi yield is always taxable as miscellaneous income with no allowance.

Do I pay tax if my yield is in stablecoins?

Absolutely. All rewards – whether in ETH, stablecoins, or tokens – are taxed at GBP value when received.

How is impermanent loss treated for tax?

Losses from liquidity pools can offset capital gains but don’t reduce income tax on yield earnings.

What if I use non-UK platforms?

You still must report earnings. HMRC taxes UK residents on worldwide income.

Can I deduct DeFi platform fees?

Yes. Transaction fees directly related to earning yield (e.g., gas for claiming rewards) are deductible from income amounts.

When is tax due on unclaimed rewards?

Only when you gain control – e.g., after unstaking periods. Pending rewards aren’t taxable.

Always consult a crypto-specialist accountant if handling complex DeFi activities. HMRC’s Cryptoassets Team offers pre-filing guidance via post for unclear cases.