Addressing and Analyzing the CRA’s Guidance Regarding the Tax Consequences of Crypto-Asset Transactions that Occur on Decentralized Finance (DeFi) Lending Protocols

  • April 02, 2024
  • Jonathan Buckle and Marco Iampieri

Introduction—

The article explores the uncertain income tax consequences facing Canadian taxpayers involved in the lending and borrowing of crypto assets on Decentralized Finance (DeFi) lending protocols. From a Canadian taxation perspective, crypto lending protocols offer users several innovative financial products and services that inevitably trigger taxable events and income tax consequences. Canadians engaging in crypto-asset transactions on DeFi lending protocols encounter a challenging responsibility regarding identifying and understanding their various provincial and federal tax consequences and the characterization of their particular transaction or item (the legal res of the item) from a legal perspective.

Moreover, DeFi’s technological complexity and recency are two additional factors contributing to the Canada Revenue Agency’s (CRA) failure to provide Canadians with sufficient guidance on the income taxation implications of crypto-asset transactions on DeFi lending protocols.  The CRA's guidance is urged to be upholstered and increased to mitigate against the risk that taxpayers will incorrectly report and file crypto-asset transactions. Also, incorrectly reporting crypto-asset transactions expose the taxpayer to an uncertain tax liability and renders the taxpayer in non-compliance with Canadian taxation statutes.

Road Map—

Part One of the article provides a high-level conceptual overview of DeFi. Part Two gives a theoretical overview of the technological building blocks that comprise the DeFi infrastructure.[1]  Part Three discusses how the two largest DeFi lending protocols, Aave and Compound, allow crypto-asset traders to engage in DeFi transactions that resemble margin lending. Part Four will explore the CRA’s current guidance on crypto-asset transactions, the identity of crypto-asset transactions, and the tax implications of DeFi transactions based on the current guidance of the CRA. Part Five will analyze the taxation consequences for DeFi crypto-asset lending.