## Introduction
Decentralised Finance (DeFi) has revolutionised earning opportunities through yield farming, staking, and liquidity mining. For UK taxpayers, these crypto rewards aren’t just profitable – they’re taxable. HMRC requires declaration of all DeFi-generated income, with penalties for non-compliance. This guide breaks down exactly how to report DeFi yield correctly, helping you avoid common pitfalls while staying legally compliant.
## Understanding DeFi Yield Taxation in the UK
HMRC treats most DeFi earnings as miscellaneous income or interest, taxable in the year received. Unlike capital gains (which apply when selling assets), yield from these activities is considered income:
– Staking rewards
– Liquidity pool incentives
– Lending protocol interest
– Governance token distributions
Tax rates align with your income band (20% Basic, 40% Higher, 45% Additional Rate). Crucially, you must report even if rewards are automatically reinvested or paid in tokens rather than GBP.
## Step-by-Step: Reporting DeFi Yield to HMRC
### Step 1: Calculate Your Annual Yield
Track every reward received between April 6 and April 5 (tax year). Essential records include:
– Dates of receipt
– Token amounts
– GBP value at time of receipt (use exchange rates from CoinGecko or CoinMarketCap)
– Platform names (e.g., Aave, Uniswap, Compound)
### Step 2: Convert Crypto to GBP Value
HMRC requires GBP valuations at the moment rewards are credited. For example:
– If you received 0.5 ETH as staking reward when 1 ETH = £1,800, report £900 income
– Use blockchain explorers like Etherscan to verify transaction timestamps
### Step 3: Complete Your Self Assessment
Report totals under “Other Income” (Box 17) on the SA100 form. Key actions:
1. Register for Self Assessment by October 5 if newly required
2. File online by January 31 following the tax year end
3. Use supplementary pages SA105 if reporting foreign platform earnings
### Step 4: Pay Your Tax Liability
Income tax on DeFi yield is due by January 31. Late payments incur:
– 5% penalty after 30 days
– Additional 5% at 6 months
– Interest charges at HMRC’s current rate + 2.5%
## Critical Record-Keeping Practices
Maintain these records for at least 6 years:
– CSV exports from DeFi platforms
– Wallet transaction histories
– Screenshots of reward distributions
– GBP conversion calculations
Tools like Koinly or Accointing can automate tracking and generate tax reports.
## 5 Common Reporting Mistakes to Avoid
1. **Omitting small rewards**: Even £1 in tokens must be reported
2. **Using incorrect exchange rates**: Always use rate at exact receipt time
3. **Confusing income with capital gains**: Yield is taxable upon receipt; later token sales trigger separate CGT
4. **Ignoring airdrops**: Free tokens from DeFi protocols are typically taxable
5. **Missing deadlines**: January 31 covers both filing and payment
## FAQ: DeFi Yield Tax in the UK
**Q: Is DeFi yield taxed differently than bank interest?**
A: No – both are treated as taxable income, though DeFi requires manual reporting via Self Assessment.
**Q: What if I lose money in DeFi? Can I offset losses?**
A: Trading losses may offset capital gains, but yield reporting losses (e.g., impermanent loss) aren’t deductible against income tax.
**Q: Do I pay tax on unrealised yield?**
A: Only when rewards are credited to your wallet. Price changes before selling are irrelevant for income tax.
**Q: How are stablecoin rewards taxed?**
A: Identically to volatile tokens – convert to GBP value at receipt time.
**Q: What if I use international DeFi platforms?**
A: Still report to HMRC. Foreign income rules apply only if you’re tax-resident abroad.
**Q: Can I deduct gas fees?**
A: No – transaction costs aren’t deductible against income tax, but may reduce capital gains when selling tokens.
## Conclusion
Accurate DeFi yield reporting demands meticulous record-keeping and understanding of HMRC’s income classification. While this guide covers essentials, complex cases (e.g., yield farming across multiple chains or high-value rewards) warrant consultation with a crypto-specialist accountant. Staying compliant not only avoids penalties but establishes clear audit trails as UK crypto taxation evolves. Always verify current rules via GOV.UK or professional advice before filing.
