Crypto Tax Legislation & Law in the UK

To date, the United Kingdom (UK) has not enacted any specific legislation to regulate the taxation of crypto-assets. Until the time such legislation is enacted, how crypto-assets are treated for UK tax purposes depends on the general principles of UK Tax law. This will require an assessment of both the substance, and nature, of the transaction. The UK’s tax authority (HMRC) do not currently consider any crypto-assets to be currency or money, and crypto-assets will generally be treated as assets provided they are capable of being owned and have a value that can be realised. The exact tax treatment will, however, depend on the specific characteristics, utility and nature of the crypto-asset, rather than any label that is applied. It is important to note that HMRC expressly state that they do not consider the buying and selling of crypto-assets to constitute “gambling” (the proceeds of which would, in most cases, be tax-free in the hands of the recipient).

General UK tax principles will tax crypto-assets depending on whether the receipt is a capital receipt (taxed under capital gains rules), an income receipt (taxed as miscellaneous income (i.e income that is not otherwise charged to income tax under other provisions (such as employment income or income of a trade))) or received in the furtherance of a trade (or, for the purposes of this guide, a professional activity) (taxed as trading income). Capital gains will be chargeable at either 10% or 20% dependent on the taxpayer, while income tax can be charged at up to 45%. HMRC expect that usually, the buying and selling of crypto-assets by an individual will constitute an investment activity and will therefore be subject to capital gains tax (CGT). Only in exceptional circumstances would an individual be regarded as engaging in a trading activity. No specific “trading test” exists in the context of crypto-assets, but in respect of exchange tokens specifically, HMRC have drawn on existing case law on trading in shares and securities.

In the context of shares and securities, this would require an assessment of multiple factors including, but not limited to:

• the time spent by an individual on the activity
• whether an individual relies entirely on their own expertise or uses the advice of brokers, and/or 
• whether the activities undertaken are characteristic of established share dealers or not – for example, if the individual has no customers and is dependent on market movements alone to make a profit. 

An assessment in relation to crypto-assets would be conducted on an analogous basis. If the crypto-asset is exchanged for a currency that is not GBP, an appropriate exchange rate must be used. For non-UK domiciled UK taxpayers in particular, HMRC regard that the situs of an exchange token is the place that the beneficial owner is resident (for CGT purposes). 

Since crypto-assets are not treated as currency, the exchange of crypto-assets for goods or services would be treated as a transaction effected for non-monetary consideration, more commonly known as a barter. This will require an assessment of the GBP value of the consideration crypto-asset at the time of the disposal. Where exchanged for another crypto-asset, this is likely to be treated as a capital disposal, therefore an appropriate exchange rate should be established in order to convert the transaction to GBP to assess the gain. Where a transaction is conducted at arm’s length, the acquisition cost of the crypto-asset received is the GBP equivalent of the crypto-asset given, and the consideration for disposal is the GBP value of the crypto-asset received in exchange. For arm’s length transactions, this will likely be the same value. Given tax can arise on a crypto-for-crypto exchange, taxpayers should be aware of the possibility of a “dry” tax charge.

Please also note that should a crypto-asset be used to purchase shares, then stamp duty reserve tax will be chargeable. If used to purchase property, stamp duty land tax will be chargeable.

Whether there is a professional activity being carried on by an individual requires an assessment of whether an individual is “carrying on a trade” in crypto-assets. Whether the individual is “carrying on a trade”, or for the purposes of this guide, conducting “professional trading” requires an assessment against HMRC’s prolific guidance. Such an assessment will spin off case law relating to a trade in shares and securities, which derives from an application of the “badges of trade”. There is no concept of a casual trader in UK Tax law.

1. Yes – capital losses can be offset against capital gains
2. Losses from a trade can be set off against future profits of the same trade. Losses from miscellaneous income can be set off and carried forward to be set off against the same type of miscellaneous income
3. N/A.

Please note that all of the previous are subject to extensive and complex restrictions and rules regarding the reliefs and use of losses.

• In respect of capital losses, a taxpayer can claim loss relief up to 4 years from the end of the tax year in which the disposal took place. For example, if an individual made an overall loss in 2022/23, their claim must reach HMRC (on their self-assessment tax return or in a letter) by no later than 5 April 2027. The losses can be carried forward indefinitely.
• In respect of losses from a trade, they can be carried forward indefinitely for relief against profit of the same trade.
• For losses on miscellaneous income, these can also be carried forward indefinitely, to be set off against the same type of income.

NFTs are not subject to any distinct taxation regimes. Like other crypto-assets, the tax treatment would depend on the specific substance of the NFT. The majority of NFTs will be taxed in a similar manner to the crypto-assets previously discussed. However, if ownership rights in underlying assets were afforded to the holder of the NFT, then the matter would become more complex and should be considered on a case-by-case basis.

Whether mining amounts to a trade would be assessed using the factors previously discussed. To the extent that a trade is not being carried out, the receipt of crypto-assets from mining is considered by HMRC as an income receipt and will be recorded as miscellaneous income on a taxpayer’s self-assessment tax return. This will require a calculation at the date of receipt of the GBP value of the crypto-asset mined and an assessment of the appropriate expenses.

The taxation of staking crypto-assets formed part of a recent consultation carried out by HMRC into how DeFi lending and staking activities are treated for tax purposes. Therefore, it is possible the rules may change in the near future. Whether the activity of staking amounts to a trade requires the same assessment as set out for mining activities. There are no distinctions between a validator and delegator under HMRC’s guidance. Under the current rules, the tax treatment can differ. Common scenarios are set out below:

• If the beneficial ownership of the crypto-assets staked are transferred, a disposal will occur for CGT purposes
• Where the return in crypto-assets is calculated as a percentage of the staked crypto-assets (e.g 5% per annum), the receipt of the new crypto-assets will be an income receipt and should be included as miscellaneous income. While this is arguably analogous with interest, HMRC do not treat the return of crypto-assets as such.
• Where the stake is withdrawn, and beneficial ownership was originally transferred, and the staker received new crypto-assets from the platform, there will be a disposal of those new crypto-assets for the crypto-assets being returned. This will generally give rise to a CGT gain (or loss) for the staker, calculated as the difference between the value in GBP of the crypto-assets when they were staked and their value in GBP when they are withdrawn.

HMRC have issued guidance for a large number of typical crypto events, models and activities. A short summary of a number of these is set out below, however, the general principles described previously will apply to each.

• Farming: yield farming, as an all-encompassing term for a variety of transactions to maximise income, will be taxable in the ways set out above. No additional rules apply to farming.
• Futures: HMRC do not have any specific guidance on trading activities such as futures. To the extent that these are held as investments, the general principles set out above apply.
• Lending/liquidity pools: the activity of lending or contributing to liquidity pools follows the analysis for staking set out in Q9 and is also subject to the aforementioned HMRC consultation.
• Airdrop: the tax treatment of an airdrop will depend on whether the recipient is providing, or expected to provide, a service in return for the airdrop. If this is the case, this will normally be taxable as miscellaneous income, or the receipts of a trade. If the crypto-asset is received as part of a promotion, or advertising campaign, the recipient may not be subject to an income tax charge. The disposal of a crypto-asset received via airdrops will be taxed as discussed above.
• Hard fork: HMRC note that a hard fork is considered as creating a new crypto-asset in most instances, and is not considered as a disposal in and of itself. Any allowable costs for the original crypto-asset will need to be allocated between the original and new asset. An apportionment of the costs will need to be split on a just and reasonable basis.
• Self-employment income: for self-employment income, please refer to the below.
• Employment income: if an employer pays an individual in tokens, or the issuing of tokens is treated as employment income, then income tax and National Insurance Contributions (NICs) will have to be accounted for on the basis that HMRC consider these as “money’s worth”. The process for this depends on whether the crypto-assets are “readily convertible assets” (RCAs). There is wide guidance as to what constitutes RCAs, but HMRC consider that generally, crypto-assets will be RCAs given the trading arrangements that exist for them. In such an instance, the employer would need to apply a valuation and subject it to the appropriate PAYE and NICs deductions. If the crypto-asset was not an RCA, then the employee should declare the income on their self-assessment tax return and pay any income tax due. NICs should still be paid by the employer as a payment of a benefit in kind.
• Inco-crypto-assets funds: income from investments into crypto-assets funds will be taxed in the same manner as investments into more traditional funds.

Individuals who make a profit or gain on crypto-assets must declare them annually to HMRC via a self-assessment tax return.

No.