Lending crypto on DeFi platforms like Aave, Compound, and Morpho creates several taxable events that investors often overlook.
The Core Tax Events
| Action | Tax Event |
|---|---|
| Deposit crypto into lending pool | No (not a disposal) |
| Receive interest in same token | Income at market value |
| Receive interest in different token | Income + disposal of interest |
| Withdraw original deposit | No (return of your asset) |
| Withdraw different token (due to aTokens) | Disposal of original + acquisition of new |
| Borrow against deposit | No (receiving loan is not income) |
Interest Treatment
Interest earned from lending is treated as miscellaneous income by HMRC.
| Interest Amount | Requirement |
|---|---|
| Under £1,000/year | No need to report |
| Over £1,000/year | Report as miscellaneous income |
Track the market value of each interest payment when received.
The aToken Issue
When you deposit into Aave, you receive aTokens (e.g., aUSDC, aETH). This is not a disposal. But when you withdraw a different version:
| Scenario | Tax Event |
|---|---|
| Deposit ETH → receive aETH | No disposal |
| Withdraw aETH → receive ETH | No disposal |
| Deposit USDC → receive aUSDC | No disposal |
| Sell aUSDC or transfer out | Disposal of aUSDC |
Multiple Deposits and Partial Withdrawals
Use a method like:
| Method | How It Works |
|---|---|
| FIFO (First In, First Out) | Default for UK crypto tax |
| Pooled cost basis | Average cost across all deposits |
| Specific identification | Track each deposit separately |
Liquidations
If your borrowed position is liquidated:
| Event | Tax Treatment |
|---|---|
| Collateral is taken | Disposal of collateral at market value |
| Loan is repaid | No tax event |
| Liquidation fee | Deductible cost |
| Capital gain/loss | Difference between cost basis and liquidation value |
Record Keeping for DeFi Lending
| Information | Why |
|---|---|
| Date of deposit | Cost basis |
| Date and value of each interest payment | Income tracking |
| Date of withdrawal | Disposal date |
| Transaction hashes | Proof |
| Platform used | Aave, Compound, etc. |
Bottom Line
DeFi lending interest is taxable income when received. Withdrawing your original deposit is not a taxable event. Liquidations create a disposal event. Keep detailed records — DeFi transactions are complex and HMRC expects accurate reporting.