Crypto Tax Sucks: E02 Decrypting DeFi Taxes

32 min read
First published:
Last updated:
Dan Howitt
Written by

We discuss

  • Why does crypto tax suck?
  • Beneficial ownership and what this means
  • Centralised/decentralised exchanges and the differences
  • Is DeFi the way forward
  • FTX - human emotion - protect yourself - smart contracts
  • The UK becoming a crypto hub - crypto adoption, regs acceptance

Your questions:

  • What to do if my staked assets have dropped in value?
  • What are the tax rules if I purchase a car using Ethereum as collateral on the Oasis platform?
  • How do I value low liquidity staking rewards for tax purposes?

Watch Crypto Tax Sucks Ep2 - Decrypting DeFi Taxes

Useful timestamps:

[2:20] Why does crypto tax suck?
[08:30] Change in Beneficial Ownership
[11:40] HMRC need to realise that central/decentralised exchanges are different
[15:40] Have recent events shown that DeFi is the way forward?
[17:30] FTX
[24:40] Can the UK become a crypto hub?
[30:00] Questions

Disclaimer: This podcast is for informational purposes only please speak to a qualified tax professional about your specific circumstances before acting upon any of the information provided


👋 Introductions

Dan: Hello and welcome to episode 2 of crypto tax sucks. This episode is all about DeFi and we're getting into the weeds of why DeFi taxation is difficult. We're going to talk about lending, staking, liquidity pools and I've got some great guests today. So I'm joined by Joe David who's CEO and co-founder of MYNA accountants a crypto specialist accountancy firm and we've also got Tom Wardle CEO of Swapsicle which is a DEX on the Avalanche blockchain.

💩Why does crypto tax suck?

So I'm gonna start off guys. I love asking this question to accountants because typically you must put on this professional persona. Maybe not you guys because you are into crypto and you're supporting all the crypto bros but I'm going to ask you why does crypto tax suck. Should we start off with you Joe?

Joe: Yeah. We’ve obviously seen the title of what you want to talk about, so I've had a think about my answer to this and, I think I could be here for a while! But I think for me it's in terms of HMRC and regulators and rule makers understanding the underlying transactions that are occurring. I think that the main reason why it sucks is because that isn't happening and there aren't HMRC people for example, or Regulators talking to companies like Swapsicle which are a decentralized exchange, exactly what we're talking about here, and understanding the fundamentals of what's happening, so I think if somebody was to do that I think we would get a much better approach, but unfortunately people aren't doing that so that's the main reason I would say.

Dan: Okay cool. Yeah, I mean it's an early market right and it's a new technology, this is when we need to be collaborating and I know some of the frustrations, just so the audience know we're co-chairs of the DeFi tax working group at CryptoUK. I know there's been a lot of frustration, there was new guidance released around DeFi in February and there was no consultation. There was no discussion, it was just released and I know that HMRC had some legal analysis and they felt the need to put that guidance out there but it would have been good to have a bit of a head start on that, to understand the rationale behind it all before just having it launched on you just after tax season when you've probably just filed, or maybe you were filing late and then you've got to take all this on to work out what you need to do.

Joe: Yeah. Because they gave an extension as well this year, so February was possible to be filing so we did have this challenge as an accountant and a tax advisory firm. We had filed a load of returns up to the 31st Jan, then we got new guidance, when did it come out? First of Feb or second of Feb or something like that? Yeah and then we had to file, in theory we then had to file different information from people after that, but also some people we'd already started but hadn't finished so it was crossing, it was a nightmare. So yeah, I think a little bit more foresight on that would have been beneficial.

Dan: Tom, what do you think? Why does crypto tax suck from your perspective and it's gonna be interesting from your side because you're an accountant and you're obviously CEO of Swapsicle so be interesting to get your perspective from both sides.

Tom: Yeah, I think it's very much along the same kind of lines as you guys to be honest. As you were saying with the guidelines being released without any prior consultation a lot of the guidelines are very open to interpretation, there's a lot of different ways that people could take it. Again, like you say me being from DeFi there are so many new and intricate ways of DeFi being released all the time so there is no way that these guidelines are going to constantly be up to date with the constant shift and momentum of this industry. So yeah, I do agree that there does need to be, these workshops obviously are really starting to help but getting there along the line to make sure that there's a clear path for everyone to follow. Because there's millions of different products out there now, millions of different tokens and it's just going to get more and more complicated, so hopefully we get there.

Dan: Yeah, I mean for me the main sticking point for the new guidance is this concept of when things change beneficial owner. And it's like what asset test do you put in place to know when that happens? There doesn't seem to be any kind of any rationale behind that to decide black and white when there is a change of beneficial owner.

So we've mentioned that we're going to cover off things like staking, liquidity pools, lending, when you participate in those activities and the counterparty, it could be a smart contract, it could be a person, it could be an exchange, it just seems that there's a blanket approach that that is a change of beneficial owner, and doesn't actually look at who controls the assets or what controls are in place where you might actually retain some kind of ownership. I don't know what you guys think of that.

Joe: So just to jump in on that Dan. I had a conversation with someone, I wouldn't name who they are here, but their view was that, if the beneficial ownership doesn't change… Take Swapsicle for example, I spoke to our CTO at Swapsicle and said if somebody stakes their funds on our platform, effectively do we have access to? Let's take FTX as an example, clearly based on this morning's news that SBF was arrested they believe that assets were stolen. They were used for purposes that they weren't allowed to be used for. In the DeFi World though, Swapsicle is a perfect example, that doesn't happen. We can't, unless we steal, people say it can't happen, obviously we can steal people's funds. Yeah, we could do that. Anybody can do that in the world. But what we can't do is use those funds in a way that the terms and conditions don't allow us to, if that makes sense, because it's all held under a smart contract. So somebody would have to break the smart contracts, to then steal those funds rather than them just being deposited in a bank account or a custodial account that then somebody can just go and pick some money out of and use. Does that make sense? The terms and conditions of Swapsicle, for example, would mean, in theory, that there is no change of beneficial ownership, because we are not able to access those funds, we're not able to use those funds, we're not able to do anything with those funds, they're simply being held effectively in escrow on a smart contract on behalf of other people. So, that person then said to me “Well if that's the case and that's what the terms and conditions say, there is no change in beneficial ownership and therefore you don't have to apply the guidance”.

The problem with that is how does a piece of software fix that problem, because you can't go “Oh for this exchange it does this, for that exchange it does that”, because there's millions of exchanges out there so then you've got to go down the blanket rule approach and either it's disposable or it's not. And so, I think I understand what they're saying, in the “Well if it doesn't apply, don't apply it”. That's fine but, that doesn't help the mass market. That doesn't help automate and speed up the process of the administration of doing your tax return or reconciling your account, because it's potentially a different rule for every exchange. If that made any sense?

Dan: No that makes a lot of sense. I thought it was quite interesting what you said about terms of service. FTX's terms of service said that you retained the legal title and that they were yours. So then if we've got HMRC looking at terms of service to decipher if there's a change of beneficial owner, well those terms of service might be contradictory to the actual fact, what actually happened with your assets. FTX say that I've got a Bitcoin on the exchange, but there was no Bitcoin right? So how do you then throw this into the mix as well of deciding if there's a change of beneficial owner? Your point on Smart contracts as well, you could code a smart contract in, an unlimited set of combinations and it's gonna be really difficult to determine what the hallmarks are of a change of beneficial owner. Like you say, you think that the smart contract on Swapsicle acts as an escrow, HMRC's kind of approach on that might be that they see the smart contract itself as its own beneficial owner. So it's trying to come up with that rule set and that level playing field and I think they did kind of address some of this in the call for evidence that they put out in the summer. To be fair what they're striving towards in that call for evidence does seem very sensible, but we haven't seen any movement on it yet.

💡HMRC need to realise that central/ decentralised exchanges are different

Joe: No. Look yes, there's an issue or if you like, what FTX did was clearly against their terms of service right, so that was clearly fraud, clearly theft and they're clearly, something very different. I guess what I'm talking about here is the difference, and this is why I say what happened with FTX wasn't crypto's problem. What happened with FTX was a fortunate person or group that that decided to do something that wasn't allowed. That's not. In fact, with Swapsicle, in principle, crypto solves that problem because we can't do it, (and I keep saying we, people probably don't know but I'm CFO for Swapsicle as well). So, we can't take that money, we physically can't do it, it's not there in a pot for us to take. The only way we could do it is if we stole it, or altered the smart contract in some way. So I think there's also a big difference there - between what can be done in the centralized world and what can't be done in the decentralized world and that I think is really important for HMRC to look at, to understand and lawmakers to say well hang on a second, let's think about this, if we don't have a centralized third party there can't be a rogue person and therefore the rules have to be different for centralized to decentralised. Do you see what I mean?

Dan: Yeah, yeah I get you. I mean, HMRC can read over FTX's terms of service, Celsius' terms of service, you can make a determination if there has been a change of beneficial owner, but what's going to be really difficult is you're going to actually have to read the code for all of these different smart contracts, all these decentralized platforms and then you’re going to have to make a judgment of how you've interpreted the code. So again, this is probably all solved by, the call for evidence that they put out in the summer, whether we'll see any impact from that I don't know, things have gone very quiet. But we put our case together at Crypto UK too, there was three options of how we can create a carve-out for this scenario. And with stocks and shares they have carve-outs, there's the repo rules if you're lending your stocks and shares out you pay no tax, we want those kind of carve-outs for crypto and it did seem that HMRC were kind of warm to that, so maybe we will see change, maybe this problem will go away, but I'm sure there's going to be another problem that jumps in just because the pace of the market and the Innovation it's just so hard to keep up right?

Joe: But yeah, that's the thing isn't it? It changes every day. I'd be interested on your side Tom. How do you feel as a taxpayer, but also an accountant, but also someone working in DeFi, how do you see all of the shades of beneficial ownership and where's your views on it?

Tom: Yeah I mean obviously, with the whole decentralized aspect, as we said the whole point of the decentralized nature is that you are always in control of your funds, so there is no third party, there is nobody there to access those funds, only you can. That's why I love what Swapsicle do, that's why I love the smart contracts that have been built you can verify everything all directly on the block scanners, you can see this is a smart contract, this is where the fund's been deposited, you can see the code, you can check who has access to it and that's why we have all of these audits done as well, to make sure that these smart contracts are airtight, nobody else can access them other than the user and I think that's such a crucial point in terms of has the ownership really transferred? Not really. I can still access it, I can draw it out whenever I want, there are DeFi products out there which have penalties on them and other sorts of things but, you're entering into that with your permission as such and you can take it out with your permission. So it's an interesting topic for sure, but I do think it needs a bit of work.

⏩ Have recent events shown that DeFi is the way forward?

Dan: Do you think the crypto world's gonna go full decentralized now we've had these collapses of, I can't even recall how many companies are in chapter 11 at the minute, Celsius, BlockFi, Voyager, FTX, there's probably three or four more to come right? So, is this the push that everybody needs to go fully decentralized?

Tom: I think in terms, decentralized in nature, in terms of the way the current laws and regulations are, I don't think a fully decentralized environment could work, purely just for disclosure reasons, what everybody needs to know. Obviously in terms of avoiding an FTX situation, yes it's shown that it's very crucial and that we do need these setups, however, I think we'll probably come to a conclusion of more of a hybrid model because you could go through a full DoW structure, be completely decentralized, operated by a community of anonymous people that's great, but are you going to be able to report and regulate these kinds of structures? Probably not. What we're doing at Swapsicle; we have a core centralized team, we have a board which all the decisions pass through, however obviously all of the users are still in there, still wanting their funds, they can still make all their decisions, they can give input as to how proposals go forward, but it's still run by a core team. So, I think we just need to try and find that happy medium really. We can't control users funds so therefore the user's always in control, but at the same time there is a team running the platform to ensure that it stays stable. You’ve got to kind of find that middle ground.

Dan: Okay. Yeah, I mean it seems to me that the centralized exchanges they're not going to go away, everybody wants that easy on-ramp. But maybe we could use, a lot of the exchanges are doing proof of funds and cryptographic techniques to confirm where assets are and how they're held. I think bringing that kind of technology into centralized exchanges is important and I think a lot of the good exchanges have been doing that anyway. It's the whole kind of verify don't trust argument isn't it, you don't have to trust with the whole decentralized world.


Joe: And that's the big thing isn't it? You know, what's people's biggest issue with FTX? The biggest issue is that they trusted a third party with their money and low and behold... Someone said to me this morning, “ Humans are made to f*** over other humans”. I'm not saying that that is everybody, but ultimately as humans, we've got that, competitive edge or whatever it is. We've got that desire to want more and sometimes that pushes it over the line, we have that in us to push that bit further. I don't know, because I don't know him, but did SPF wake up when he started FTX and go “Do you know what I'm going to do, I'm gonna screw everybody over”? Like he probably didn't, let's be fair, it probably got a little bit away from him, he probably did something and then something else, and then just all of a sudden you're in this hole that you can't get out of. So, I think the other thing is as human beings we make decisions. There are some people that wake up in the morning and they do bad things because that’s the way they're wired and they always intended to do that bad thing, but there are other people who just get in a hole and I'm not excusing that, but as a human your automatic reaction is to defend yourself. Do you know what I mean? So, when he's in that situation - what's he gonna do? He's gonna do whatever it takes to defend himself and if that means making the fraud effectively worse, he's going to do that. So, in the decentralized world, in a smart contract, that doesn't happen, we haven't got a human brain to make that decision. It's not about whether that person wants to defend themselves or not, it's about whether the smart contract agrees with the way the transaction is going to work. So do I think that we can be completely decentralized? No I don't. I think that it takes executives at the top of companies in order to make decisions.

Dan: I do agree with that. But I do think that computers in a sense or smart contracts can take away some element of human emotion from a situation. I think that removing human emotion from a lot of things can be a very good thing especially for... We see a lot of customers that trade, I should say attempt to day trade, so they read all the stories online, they think they can make money, they try and they subscribe to certain influencer channels that give you strategies of how you can earn a day trader income. But what's really going to trip you up is your human emotions right, you're going to get greedy, you're not going to set enough aside. Funnily enough that's also going to screw over your tax position if you don't plan that at the same time as well. So I do like that smart contracts kind of keep your feet on the ground. A set of controls and help you invest in the market, set of constraints that only allow you to do certain things and it's a great innovation. One of the things that frustrates me is this, the whole industry is very innovative and we have this ambition for the UK to be a crypto hub, but yet certain things maybe, from HMRC, the guidance that was released kind of contradicts that greater vision for the UK to become a crypto hub. So do you think we can get there? Can we be this beacon jurisdiction that is going to be a crypto hub or do you think we've got a lot of work to do?

🏙️ Can the UK become a crypto hub?

Joe: Personally I think it's going to be a challenge for any, what's the word I'm trying to use, like established country - so UK, US, even places like France. Where actually we've got so much going on. We've got so many other rules and things that contradict potentially what the benefit of going down the crypto world looks like. I do think that actually you potentially always going to have a have to look at those countries that maybe have a bit, and this is a bad example, but let's say Ireland as an example. Say Ireland doesn't have and I'm making this up by the way, strict rules on certain bits and pieces, they've kind of got the ability to go “Do you know what we aren't tied to all these different things over here and over here and over here, so actually we can just forge our own path and create something special”. Whereas the UK, as much as we think we're independent, if the US tell us to jump, we say how high. So, in reality, how much are we gonna be able to do? It is my worry and that's not through want of trying but where we are in the world. Whereas a country that has a little bit more, kind of independence I guess, from the global economy, maybe that has more chance of saying do you know what we can really adopt to this properly because we have a little bit more independence and in a way nothing to lose. The UK you could argue have quite a lot to lose by upsetting their friends or their acquaintances.

Dan: Yeah it seems to me there' this ambition here and for me that it's just obvious that crypto is going to be this major development. You look at user adoption growth it's annual increase of like 120% year on year, potentially a billion crypto users by 2030 so it's blatantly obvious this is going to be a major thing. I've been involved in crypto for a very long time. We met with some regulators very early on in 2013 and we're still, nearly 10 years on and there's still these regulatory log jams, let's face it the tax needs sorting out for this, it needs simplifying dramatically. There's all these other jurisdictions taking a piece of that pie, the early infrastructure and we've kind of lost first mover advantage. So Tom, have you got some similar frustrations?

Tom: Yeah. I mean Joe pretty much covered everything that I would have said to be honest. The main thing is going to very much be as you say having these clear regulations and policies in place which make it easy for, the bigger corporates to follow along, because at the end of the day adoption is going to be the most important thing for us to become one of the global hubs of crypto. Without adoption we're not going to get anywhere and until these guidelines are clearer, nobody's going to want to touch it. It's as simple as that, so we need to get to that stage - clear guidelines, it's adopted, widely accepted and then we'll get there. But, as we say it's a delicate economy at the moment, we want to make sure that we tread in the right place and obviously unfortunately of all these bad events this year it's probably not helping at all. So yeah, time will tell, as you say it's dragged out for a long time but hopefully now that we've finally got stuff moving through Parliament we might see the end of the tunnel in the next five years.

Dan: Hmm there's a lot of noise at the moment, isn't there? The signal is the user adoption but FTX and everything.

Joe: What do you think Dan? On the UK being a crypto hub?

Dan: I think it all depends on leadership. I think you look at certain jurisdictions where they perhaps have a bit more autonomy in terms of political process, so if you're someone like El Salvador and you're a dictator you can decide tomorrow if you want to go on a Bitcoin standard. If you're the Sikh of Dubai you can decide that you want to be a crypto hub. For the UK to have the ambition to be a crypto hub, that is a democratic process and I think there's a lack of understanding with crypto, which is kind of the main barrier as to why we haven't embraced it. I mean we are a massive Financial Centre, arguably the world's largest financial centre, we are a fintech hub and for me crypto is just the next iteration of fintech and we've... For me it's just passed us by. All the top entrepreneurs that use Recap to do their taxes, they're structuring things offshore, they're covering their ass from a regulatory perspective because they fear operating here because there is no clarity. So, are we hollowing out the UK in terms of this new innovative industry? I would say that we are at the moment and the government really needs to pull the finger out if we want to retain being a world-leading financial hub because everything's going to go crypto. There's just no question about it, everything is going to have some kind of crypto rails and yeah we've probably missed the party, but maybe we can get some of that back. We have had these issues like FTX, Celsius we're very good at being highly regulated in market here, so maybe, we can turn it around.

Joe: Maybe, yeah that is true. The regulatory piece is true. We do have a very good regulatory framework here in terms of the way that the framework works and the protections that it offers we doseem to stand out at that, so you're right maybe we can. And that does attract. But again you come back to the Democratic process it's all very well the three of us sitting here and going we're all from the UK, we vote for it. But the majority of people aren't in crypto, the majority of people don't care about crypto, and in fact probably the majority of people think that it's a scam. So actually, if you if you take a democratic approach do you actually get the answer that we as crypto people want in terms of in terms of the regulation and support and what not? Potentially not. So that's the other problem, by taking that Democratic approach.

Dan: Yeah I completely agree. Yeah. Well we'll see what happens there's a round of bills to go through right so... maybe some positive outcomes to come and I think that if we get the DeFi call for evidence response that we want that's going to simplify a lot of things.

💬 Community Questions: What to do when staking coins have dropped in value but need to pay tax bill?

Dan: So first one - we've got we've got a customer who's staking coins, and the value of those coins have dropped 25% from their initial value. So his staking rewards have dropped in value, he's left with 25% of what they're worth what can he do when he's filing his taxes because he needs to draw down some of those funds to pay his tax bill?

Joe: I guess in that particular case there isn't a great deal you can do, in that the income, if it was generated in a previous tax year for example, will still be subject to income tax at the rates that it was brought in at. So unfortunately there isn't anything to do with that, the only thing I would say is planning ahead. If you are generating passive income through staking or mining or anything like that, I would say plan ahead. Think about… I appreciate this is easy as an accountant to say, if we were talking to clients who run businesses for example we'd be talking to them about putting some money aside for VAT or for corporation tax or self-assessments etc and the same does apply here. If you're earning, if you're generating a passive income, even just putting 20% to one side would give you a starting point to make sure you've got something in the pot. I would say unfortunately there's not a great deal you can do, if the value has gone down in an annual, crossing tax years as well that's another problem. You know, we've got a lot of people where they earned good money in the last tax year, let's say we're now in the new tax year, but obviously we're six to nine months into it, well but that that income effectively still stands from last year so there are things you can potentially do going forward if the token then becomes kind of negligible. You can do things like negligible value claims and things like that but most of the reliefs are weighted towards capital gains tax and we're talking about income tax for staking rewards so unfortunately not a great deal you can do. But I would just recommend planning, trying to plan a bit and put some to one side.

Dan: Yeah it's good advice. I mean do you guys plan your crypto taxes? Use any kind of software? I think it's I think it's interesting that people that are heavily invested in this market don't have the finger on the pulse of what is their tax position, what's their bill gonna be next year, have I set enough aside for it? There seems to be a lot of head in the sand around this kind of stuff and like you say it is like running a business especially if you're participating in rewards-based activities - staking rewards and things.

Joe: Do you think that is because though - and this is not disrespectful by the way, to anyone. But is that because people aren't business owners, therefore they don't think about these things and potentially their minds aren't wired that way, and actually the biggest thing we can do as accountants, or as I would even argue people like Swapsicle, is education. How do we educate people? Same to you Dan, as Recap, how do you educate enough for people to get the message? We like you, do our own podcast. Education is the key. We would always recommend that you use software like Recap to do it but again I would yeah throw that at Tom as a taxpayer again - did you plan?

Tom: Yeah, I mean obviously it helps a little bit me being an accountant, I did have some sort of grasp that I would need to tax plan even though tax isn't my specialty I put money aside in the process, that's all fine it did occur to me that I would need to register for self-assessment but again that might not be apparent for most people. And yeah, I had a little play with a couple of different types of software, I had a rough estimate in my mind of where my liability would sit, and that's kind of where you get to. But it is insane, a lot of people who have entered into crypto, a lot of people I know, especially retail traders have never registered for self-assessment before, they don't know this arena, so yeah education is key.

Dan: Yeah we mentioned on the last episode “Are HMRC gonna have their cake and eat it as such”? Because they're not really educating people. If you're on PAYE and you're on Coinbase on your lunch break, registering for self-assessment is just not on your radar. Then you haven't filed and they might find some data on you? They might go to Coinbase every year and go actually this guy traded and send you a brown letter. We know we've got compliance things coming in the future like CARF, Crypto Asset Reporting Framework, where HMRC is going to get all this information and then they're going to come down really heavy on people and say well you haven't filed - but then who's educating them in the first place? I mean yes, we can, but where's the budget from HMRC to tell people that they need to file, they need to get ready for self-assessment, I think that's missing at the moment. There's a lot of stuff on enforcement and fines but there isn't anything on actually what you need to do.

Joe: Yeah and look I don't want to stick up for HMRC in any way here by the way, but my other argument then, how much responsibility is on HMRC and how much responsibility is on the taxpayer? And I'm not saying that HMRC should do nothing, but at the same time, we talk about government spending and public funds and where that should be deployed and should you be paying nurses pay rises or should you be paying HMRC the money to educate? I think there's a huge question mark there as to what extent should HMRC be educating and to what extent should people like us, the private sector, how much should we be doing? And you're, as a company great at it, I think we're pretty good at it. So I think that is really important as well, that we don't just rely on the public sector, we don't just rely on government-funded organisations as private companies, we do more to educate and to support and to help which I think the likes of Recap and MYNA and Wright Vigar and people like that are very good at which is really important.

Dan: Yeah I thought it was interesting what you just said then about kind of self-responsibility for these things a little bit. So there's a there's a lot of synergies with managing your crypto, if we look at what crypto is all about it's about self-custody and it's about owning your own assets and if you think about it most people have been used to having a bank that looks after those for them right? Someone else looks after your money. You don't have to think about chucking it under the mattress and then crypto came along and then everyone's all of a sudden got to get a hardware wallet and write down a seed phrase and go through all this painful process to have self-custody over your assets. I think the same is with tax? People that are on PAYE, it's done for you, right? It's just not on your radar and it's a massive ball ache to do it yourself, to find an accountant, to register for self-assessment but it's part of a process to becoming an investor. So perhaps as people become wealthier in crypto, they make some decent gains then it's more on their radar I don't know!

Joe: I mean you know my view. My view is very much about personal responsibility, people need that, we've got a blame culture, we all want to blame everybody else. You know, if you haven't got any money because your crypto's gone down, you're going to blame HMRC for not applying a slightly different rule or and like I said, I'm not a fan of a lot of these rules, and sometimes the way HMRC operate but I am a fan of personal responsibility and people have to take responsibility for their actions and it's too easy to blame other people. Like you say crypto is built on self-custody, not relying on anybody else, yet crypto people then want to rely on somebody else to fix a problem that they might have created. I'm probably going to piss a few people off that listen to this if I'm honest, but it's a fact, we've got to take an element of responsibility. Tom said earlier he's an accountant, okay, so he's got a slight head start, but he's a taxpayer at the same time and he took some action. So, I just think responsibility is key.

Tom: Obviously with most people that are investing in crypto, most of them are going to use an app like coin market cap for example, everybody's going to be tracking their positions, everybody wants to know where they're at and when they're recording these gains and losses, you know you're tracking them for a reason. To be honest I don't know many people who are just investing in crypto and just leaving it there, most people are tracking and updating it, so the data and information is there for people to use, these exchanges have the capabilities to export your Excel spreadsheets for these reasons, and as Joe said it's about self-responsibility. You're doing all of this for a reason, you have the ability to track all these things and you know you've got to use it for something and that is your taxes, so yeah it is very much down to just taking a step back and just thinking about the wider environment that you're participating in.

Dan: Yeah. We kind of said on the first podcast that, I like sleeping right, and I don't like brown letters on my doorstep, so that's a good motivation to get your taxes sorted. And there's some positives, if you get on top of all this you can understand your tax position it allows you to plan. We got into the discussion around if you really are long crypto and you're looking at planning, you can look at things like SAS pensions, maybe incorporating a business but you're not going to know if you need to do all of that unless you're doing your accounts. Software like Recap you can get all that in, you can get that understanding and you can then make those decisions. And it can be pretty hands-off once you've got everything up to date, but unless people do that, you are playing around in the dark. You're not going to know what your tax bill is and then you're going to be asking questions, like my assets have gone down in value, I've got no money to pay my bill. So like Joe said it all comes down to planning.

💬 Community Questions: is purchasing a car by borrowing Dai with Eth as collateral taxable?

The next question is a really good DeFi one. So this user is asking “I would like to purchase a car by borrowing Dai on the decentralized Oasis platform with my Ethereum as collateral - is this a tax free transaction”?

Joe: Well the short answer is, based on the guidance, no. But again having said what we said earlier about terms and conditions there's another argument to say if you can read through terms and conditions, I haven't looked at them for Oasis, but if you were to read through terms and conditions and find an element that clarifies that there is no beneficial ownership change when you when you collateralise that loan, then potentially you could look at that as not being a taxable transaction. But per the guidance, a collateralised loan, putting collateral down is deemed a transfer of beneficial ownership and therefore that Ethereum that you put as collateral will be a tactical disposal.

Dan: Yeah I'm on a similar viewpoint. I think you could argue it, if you really wanted to but it's kind of medium to high-risk right? And this is really frustrating for me because... a year ago there was all the influencers on Twitter, throw your collateral down, take out a loan, don't create taxable events. And a lot of that was coming from U.S influencers that have a very different tax system to here. And then we got the DeFi Lending and Staking clarity in February and yeah low and behold if you had done all of this stuff, you're going to be in quite a tricky situation.

Tom: I was just gonna say there's obviously the interest implications and stuff as well you've got to consider in that case but, yeah other than that, it's a disposal.

Dan: So how will it change if we get through our DeFi lending and staking call for evidence responses? How do you think it will change Joe?

Joe: Yeah, that's a good question. I'd have to remind myself of some of the bits and pieces that we that we put in there. Its funny actually if you talk about this internally in the office around a difference sometimes between accounting for businesses and tax for individuals or what have you, in accounting there's a lot more substance over form - what are you doing? It doesn't really matter what the concept is, it's actually what are you physically doing? Let's look at that, and then let's account for that based on what you're doing, right? And whereas tax it does seem a lot more like, this is the rule, this is what we say, it doesn't matter what you were intending because that's the rule and that's what you have to do. So I think there's an element of that that could be brought in. What is the intention here, when I collateralise a loan, do I believe that I'm giving up ownership of that asset and am I intending that part of the product (and I'm not saying this is exactly what we said by the way) but that is one thing that I think is really important is having that element of what are you trying to do, what are you trying to achieve. This is an argument that I've had pushed back at me on many times that I've said it… But when I get a mortgage and I put my house up as collateral effectively to borrow that money, I don't dispose of my house, the bank doesn't own my house, the bank has a charge on that property, in that if I don't repay my debt they have the ability to call that debt in, right? So, there's an agreement that says that I will give them my house or I won't give them my house, they'll take my house if I don't pay my mortgage, because there has to be protection for the bank that's lending the money but that doesn't mean the beneficial ownership is necessarily changed. So, should it be the same in crypto? Should it be that actually the ability to take back the collateral if not repaid is there and obviously at that point there's a change of beneficial ownership or should we have the route we've got at the moment where it's a change at the point of transfer? I think it should be the opposite. I think it should be the example I just gave. So again the reason why people bat that back is they say that crypto is different. I think, when I say something that I think is fairly sensible people say, yeah but crypto's different we can't treat it that way it's different. But then when you say well hang on a second the rules that you're using are the same rules that you apply to other asset classes so for one minute you want it to be different and the next minute you kind of treat it the same, so I think a bit of clarity on that is important to be honest.

Dan: Yeah. It's interesting that you say that around crypto is different, I mean it is a very different asset to anything that we've ever seen before. This is an asset that you can own outright that isn't defined in law as a particular type of asset class, the law commission have said there's this kind of work required to kind of get crypto into English and Wales law. And so we're kind of dealing with this nuanced asset that we've never seen before, we're trying to apply existing rules to existing assets to something that is so nuanced and I think sometimes we do pick and choose that oh it'd be great to include it under that, and then another time it's like no it's completely different we need something else for it. And I think what it needs is that, again the law commission are on top of this, if you get it defined in law, as its own particular type of property then you can rip up the rule book a little bit and define your own rules around it. You can define particular taxation on it as well. Before that happens anything that we do with the legal system or even HMRC rules around cryptoassets it's all just going to be kind of teetering around the edges until we can actually define it in English and Wales law.

Joe: I guess the issue though with that is that's a whole different ball game right? What HMRC they are trying to do at the moment, is say look we want to give a little clarity, I think some of us would argue that they've done the opposite. But what they're trying to do is give clarity and I guess they would say “Look, for us to get a whole new rule basis through, as an asset class it's going to take years and we're trying to give taxpayers that clarity now”. You've just made a good point that the law commission are a great example of an organization that are trying to understand and trying to work on how can they change things, how can they improve it. I mean we haven't seen any actual proof of the pudding, yet, but the theories there.

Dan: Yeah. I read that law Commission report in July and I was like “They just get it”. They get that this is such a disruptive technology and that the benefits to the economy are going to be insane. And the fact that they actually wanted to define cryptoassets in law and they want the UK to be a major jurisdiction where it is defined in the legal system, kind of feeds into that crypto Hub narrative right? But it's how quickly can we get there? It just seems that they take forever and by which point we've lost our competitive advantage.

💬 Community Questions: can you adjust the value of staking rewards when they are inflating your tax?

Right, so I've got one more question from our community, it's around low liquidity coins. So basically, they're saying that they have some low liquidity coins coming in as staking rewards and they're having to value those in GBP and they believe that that's kind of inflating the tax that they need to pay. They're asking how best can I adjust the value of my staking rewards? I suppose the question is can you actually adjust the value of them?

Tom: Well obviously the issue with low liquidity coins is it's incredibly hard to depict the market value because of how much you're going to get slipped. Obviously, the lower the market value, the higher the slippage percentage is going to be, so while on paper you're going to have a thousand dollars worth of this token if the liquidity is only 500 dollars you're not going to get a thousand dollars for that token you are going to get a significantly lower amount when you sell it onto the open market. So yeah, it is quite it's a tricky one in terms of the valuation when it comes to low liquidity coins because, that thousand dollars on paper, you don't realistically want to use that. So, yeah I guess it all just comes down to are you gonna take the rate that you're going to take from selling onto the market or are you going to take what's on paper, probably both are incorrect so how do you find that happy medium?

Dan: Yeah tricky one isn't it? I mean value valuations can really screw you over. Where do you get the valuations from? How do you make sure it's consistent? How does it stand up to HMRC? You’ve kind of got all these questions, there's no black and white answer really is there? It's kind of like just do your best and try and justify it, override it yourself maybe, and justify it?

Joe: Yeah I think ultimately as well we're talking personal taxes so we're talking self-assessment, so we're taking it is what it says on the tin - it is a self-assessment of your tax position. And if HMRC disagree with you then my argument would be as long as you've got sufficient evidence to back up the reasons that you've done what you've done, then in principle you're in a fairly good spot. I think. And there is software out there, um there's a company called Lukka, I don't know if you've come across them Dan but they're really good. I do quite a lot with them and they have their ( this isn't for all tokens out there) but they have their fair value kind of methodology, where they basically, and I won't I won't do this justice by the way, but they go out to all these different pricing markets and pull together what they would argue is a fair value for that token because as we all know if I try and buy Bitcoin on Binance I potentially am going to get a different price now, albeit very slight given the liquidity of Bitcoin on Kucoin as I will on Burnouts for example. So even at that level there is the chance of a different price. I remember a couple weeks ago I was trying to swap USDT for Ethereum on Kucoin and it took me ages to get the order to go through just because the prices kept changing, whereas I did it on Binance it happened straight away because the liquidity is significantly higher, it just went, it just matched off straight away and went out the door, so yeah I think I think that's a way to do it is to get a fair value methodology. We talked about it before we came on air you know, one client I was working with we looked at their price of their token and then we basically said if they were to sell so we went on the on the Dex that it was available to trade and we typed into that say a million oof the token - if they were to sell million of the token what would the slippage be and the slippage was 98%. So there's an argue argument to say well actually there's zero value, pretty much in that token, or in the holding that I've got of that token because if I try and sell all million I'm never going to be able to generate the funds to cover anything so what are a million tokens worth? But then the other argument is that if you had five, you tried to sell five, you probably get say one or two percent slippage, all of a sudden you're now going are those five worth a dollar, but the million are worth nothing? But then we can't have one taxpayer that says I've got a million therefore it's worth nothing and one taxpayer that's got five and they go oh that's worth a dollar so that's five dollars there. It is really tough, so I think that’s gonna be a hard one to argue but, if you feel like you've got a methodology of working it out or you want to maybe spend the time of, on the day, of you receiving those tokens, what the prices were on all these different exchanges that you could get it on, maybe that's a route. But again if you're using software like Recap for example, you guys are going to have to pull data from sources such as Coin Market Cap and places like that so then you're gonna have to override prices in the system and yeah it's a challenging one definitely.

Dan: Yeah, Similar to Lukka we use a company called Nomics for our fair market valuations, so they pool all the top exchanges and they try and remove some of the exchanges that maybe are not as legitimate to try and come up with a fairer fair market value. Liquidity is a factor in that as well. I think this question's a really challenging one and we've been into the weeds of this a little bit at Crypto UK. Like what happens if you've got Pop tokens on, say Avalanche, but then you've also got Pop tokens on another blockchain and you've got two Dex's on each blockchain, do you use a fair market valuation across both blockchains? Do you just pick one? There's a similar kind of argument if you're trading Bitcoin, you're trading it on Kraken do you need a value from Kraken or can you use a global market value? And there's no guidance on that. It's just like what is consistent, what's fair, and maybe just stick to one methodology.

Tom: Arbitrage opportunities they're always going to exist. You're never going to get an exact price match across multiple different markets on multiple different chains, that's why these Arbitrage Bots and stuff exist and people make a fortune off of them. But yeah, it is a very tricky one to get that baseline valuation and it's not an easy question to answer at all but there will be certain methodology to use.


Dan: Yeah, sure. Well we've I think we've kind of talked around DeFi enough. Hopefully we're going to get some clarity from HMRC on what's going to change in the months ahead and maybe some of these pain points are gonna disappear at some point in the future.

But we're going to wrap it up now, thank you very much for your time on this Joe and Tom and I look forward to seeing you all on the next episode of crypto tax sucks. Cheers!

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