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Crypto-assets and taxation

17th March, 2022

There is a lot of confusion around crypto-assets and how they are taxed in the UK. One false train of thought is that because they are viewed as similar to gambling or winning the lottery, they fall outside UK taxation. This is simply not true. In this blog, we will examine the definition of crypto-assets and how they are taxed in the UK. 

What is a crypto-asset?

Well, according to Wikipedia:

“…a cryptocurrencycrypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.”

It is estimated that over 3.3 million people, 5% of the United Kingdom’s total population, currently own cryptocurrency.*

Crypto assets are usually referred to as tokens and there are 4 types of Crypto-assets:

  • Exchange tokens – used as a means of payment
  • Utility tokens – provide access to specific goods or services
  • Security tokens – provide rights or interest in a business
  • Stablecoins – an asset that is pegged against a fiat currency to minimise volatility.

HMRC does not view crypto-assets the same as currency or money, therefore they are taxed like traditional assets. They can be subjected to Income Tax, Capital Gains Tax (CGT), Corporation Tax, or Inheritance Tax (IHT).

In this blog, we will focus on Crypto-assets and income tax and capital gains tax only.

Crypto-assets – Income and Capital Gains Tax

In the majority of cases, crypto-assets are held for capital appreciation and therefore the most common tax they will be subjected to is CGT.

In rare cases, HMRC may deem the dealings as a trade rather than an investment, in which case profits will be subjected to Income tax instead.

CGT is payable on gains arising from the disposal of crypto-assets. Disposals include:

  1. Selling tokens for money
  2. Exchanging tokens for a different type of token
  3. Using tokens to pay for goods or services
  4. Giving away tokens to another person (except between spouses/civil partners).

Trading between tokens will be a disposal even if a fiat currency isn’t realised.

However, a disposal does not occur if a token is transferred to another wallet that is beneficially owned by the same person.

A common misconception

A common misconception revolves around number 2 – people view all crypto-assets as one asset when in fact each type of token is a separate asset e.g., Bitcoin and Ethereum are separate assets.

So, each type of token will be pooled for CGT purposes. The Same Day and 30 Days Matching rules apply for crypto-assets, just as they do for traditional Stocks and Shares.

For CGT reporting purposes, the pound sterling value must be obtained at each purchase and disposal of a token.

Employment and trade income

Crypto-assets received as employment income count as ‘money’s worth’ and are therefore subject to Income Tax and National Insurance contributions.

Mining and staking activities may also be deemed as a trade and subject to income tax.

For a more in-depth look at crypto-assets, click here for HMRC’s crypto-assets manual.

Tax planning is always better if looked at in advance so if you would like further information or are not sure how the tax rules apply to you personally, then please do get in contact with us for a chat on 020 7384 0920 or visit our website.

Written by Faizan Sarwar ACA CTA – Tax Manager