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.
Practical reporting for DeFi lenders
DeFi lending is manageable from a tax standpoint if you treat deposits, interest, and withdrawals as three separate trackers. On deposit you record the date and value of what you placed in the pool — that establishes the cost basis — and you record the return of your original deposit as a non-event. Separately, you track each interest payment at its market value on the day it lands, because that is the moment income arises and, if it is in a different token, when a disposal of the interest token happens too.
The aToken point deserves particular care on Aave. When you deposit ETH and receive aETH, no disposal occurs, and withdrawing that same aETH back into ETH is likewise not a disposal. The difficulties start when you move tokens around outside that clean round-trip — selling or transferring aTokens is a disposal, and withdrawing a different version of a token can realise the original. Rather than relying on memory, keep a log of every deposit, its value in pounds, each interest receipt with its value and date, and the balance you withdraw and when.
Record keeping for DeFi should centre on the transaction hashes that prove each step, together with the platform used and the denomination of each token. Because HMRC applies the standard UK cost-basis rules to disposals, keeping consistent date-and-value records for every leg keeps your eventual capital gains and income calculations accurate. For anyone running frequent lending, borrowing, and liquidation activity, consolidating this into tax software that understands DeFi will save considerable manual effort and reduce the risk of a mismatch should HMRC request your history.