Aave Lending Tax UK: HMRC Rules for DeFi Lending

You supplied 10 ETH to Aave. Got aETH back. Maybe borrowed some stablecoins against it. Now you're staring at your tax report and it says you disposed of 10 ETH worth £28,000 and owe CGT on the entire amount.

Economically, it felt like a loan rather than a sale.

This is one of the most fact-sensitive areas of UK DeFi tax. The current HMRC position depends on beneficial ownership and the asset or right you receive, while draft rules proposed for April 2027 would change the treatment of qualifying arrangements.

Aave deposits: current law is fact-specific

When you supply tokens to Aave (V2's deposit() or V3's supply()), you're lending them to the protocol's liquidity pool. In return you receive aTokens (aETH, aUSDC, aDAI) that represent your claim on the deposited assets plus accrued interest.

HMRC does not give every Aave deposit one automatic answer. CRYPTO61620 says to examine whether beneficial ownership transferred. If control transfers to the protocol, the deposited tokens can be disposed of. If the user receives aToken consideration, HMRC's current guidance can treat that as a token-for-token exchange at market value.

ChainTax currently applies Transfer treatment when it can decode both the supplied asset and the aToken received, carrying Section 104 basis between them. That is a disclosed product treatment, not a statement that current law always requires it. If a required leg is missing, the event stays in Needs review.

Withdrawals need the same legal analysis

Withdrawing burns or reduces the aToken position and returns the underlying. Under current guidance, the answer follows the legal and economic rights created on deposit rather than the label “withdrawal” alone.

Under ChainTax’s current transfer treatment, the original cost carries from the underlying into the aToken and back again. Fully decoded withdrawals move that basis automatically; an incomplete withdrawal remains visible for review.

aToken interest: the hard part

Here's where it gets genuinely tricky.

Aave interest doesn't arrive as separate reward transactions. There's no "claim rewards" button you press that emits a Transfer event your tax tool can see. Instead, your aToken balance increases continuously. Every block, your aETH balance ticks up by a fraction. When you deposited 10 ETH and later withdrew 10.3 ETH, that extra 0.3 ETH is interest income.

HMRC treats this as miscellaneous income, taxed at your marginal income tax rate (20%, 40%, or 45%), not capital gains. It should be valued at fair market value on the date of receipt. The problem is defining "date of receipt" when interest accrues continuously.

For your Self Assessment, aToken interest goes on SA100 under "Other income", not on SA108 with your capital gains. See our guide to reporting staking rewards for the full breakdown of where DeFi income sits on the return.

Borrowing against your collateral

Receiving borrowed USDC is not the same as earning USDC as income, but that does not make the whole Aave borrowing cycle tax-neutral. The collateral transfer, acquisition and use of the borrowed tokens, and repayment all need to be considered separately under the rules in force.

ChainTax currently marks recognised borrow and repay calls as transfers and explains that treatment in the event note. If the economic activity includes a swap, liquidation, or missing token leg, review the separate event rather than relying on the method label alone.

The interest you pay on borrowed tokens is trickier. HMRC hasn't published specific guidance on whether DeFi borrowing interest is deductible, shocking as that sounds. In traditional finance, loan interest is sometimes deductible if the loan is used for qualifying purposes (like buying income-producing assets). Whether the same logic applies to Aave borrowing is genuinely unclear. Conservative position: don't deduct it unless your accountant confirms.

Liquidations: the painful one

If your collateral ratio drops too low, Aave's liquidation mechanism forces a sale of your collateral to repay part of your debt. Someone calls liquidationCall() and your tokens are gone.

This is arguably a disposal. You didn't choose to sell, but the tokens were disposed of at market value to cover your outstanding loan. HMRC would likely treat this as a capital gains event, with proceeds being the market value at the time of liquidation, cost basis from your Section 104 pool.

ChainTax classifies Aave liquidations as a Capital Gains disposal automatically, with no manual edit required. Proceeds are the market value of the seized collateral; cost basis comes from your Section 104 pool.

Flash loans

Flash loans are single-transaction borrow-and-repay operations. You borrow millions, use it within the same transaction, repay it plus a fee, and the net effect is whatever profit (or loss) you extracted.

The borrow and repay themselves aren't taxable, by the same logic as regular borrowing. But if the flash loan transaction includes a swap or arbitrage that generates profit, that profit is taxable. The flash loan is just the funding mechanism.

In practice, if you're executing flash loan arbitrage, you probably already know your tax position better than most accountants do.

V2 vs V3: does it matter for tax?

Not really. Aave V2 uses deposit() and withdraw(). V3 renamed these to supply() and withdraw(). The economics are identical: you supply tokens, receive aTokens, earn interest via balance increase.

V3 introduced efficiency mode (eMode) and isolation mode, which affect borrowing parameters but don't change the tax treatment. A deposit is a deposit. ChainTax handles both V2 and V3 method signatures across Ethereum mainnet, Arbitrum, Optimism, Polygon, and Base.

The real danger: phantom gains from misclassification

Say you supplied 50 ETH to Aave when ETH was £2,800. That's £140,000 of tokens moving to a smart contract. A tax tool that doesn't recognise the Aave lending pool contract will see £140,000 leaving your wallet and record it as a disposal.

If your cost basis was £1,500 per ETH (£75,000 total), the tool reports a £65,000 capital gain. At 24% CGT, that's £15,600 in tax you don't owe. On a transaction where you still own every single token.

Then when you withdraw, the tool records an acquisition at the withdrawal-date price, resetting your cost basis. If ETH dropped to £2,200 and you later sold, the tool would understate your real gain because it's using the wrong cost basis. The errors compound.

A flow-only import can confuse a lending movement with a sale or swap. Contract, method, token-leg, and beneficial-ownership evidence all matter before deciding the treatment.

Aave operations: quick reference

* Periodic balance snapshots estimate return that accrues without per-user events; they do not reconstruct every block.

What the NGNL regime means for Aave users

Draft No Gain / No Loss (NGNL) rules published on 13 July 2026 would apply to qualifying single-cryptoasset lending arrangements. An acquisition or disposal of a qualifying interest in exchange for the same type of invested cryptoasset would use NGNL treatment.

Protocol name alone does not establish that every transaction meets the draft conditions. ChainTax will need tax-year-aware qualification rules if the legislation is enacted.

How to check your Aave transactions

Open your report and check each Aave supply or withdrawal for both economic token legs and the basis movement. A disposal is not automatically wrong under current guidance; a high-confidence transfer with a missing leg is wrong, which is why ChainTax now leaves that case in Needs review.

You can paste any Aave transaction hash into the free transaction explainer to see exactly how ChainTax classifies it: protocol, method, classification, and reasoning. No sign-up required.

For aToken interest, compare ChainTax’s snapshot-derived income with Aave’s own position history, especially where a large balance change crosses a tax-year boundary.

For everything else on Aave (supplies, withdrawals, borrows, repays, liquidations) let a UK crypto tax calculator read the contract signatures and classify each event correctly. A spreadsheet or catch-all flow rule can collapse these distinct actions.