Cryptocurrency is a form of cryptoasset that makes use of a type of distributed ledger technology called blockchain. Cryptocurrency can be used in a number of different ways, such as a means of exchange or held as an investment. Individuals may acquire existing cryptocurrency (eg, by way of purchase) or obtain new tokens (eg, due to ‘proof of work’ or ‘proof of stake’ by performing network maintenance by validating the addition of new blocks to the blockchain).

As a starting point, the charge to tax is based on the activity being performed.

Where an individual acquires cryptocurrency for investment purposes any gains will be charged to capital gains tax (CGT). If they are provided by way of employment and can be considered to be a readily convertible asset (RCA) then the receipt is charged to income tax and national insurance contributions. If the individual is carrying on a venture in the nature of trade then transactions are charged to either income tax or corporation tax (see TAXguide 02/24: Taxation of cryptoassets for business).

There are no specific UK tax rules for cryptocurrency, so existing provisions are applied to determine the tax position. This is relatively straightforward in some cases but can be challenging in others. New legislation could provide clarity in areas of uncertainty. Notably, HMRC is currently considering the context of both decentralised and centralised finance lending and staking.

HMRC has published a cryptoassets manual entitled CRYPTO. HMRC’s manuals are internal documents that provide HMRC officers with instructions on how to approach taxation in given areas. HMRC’s cryptoassets manual sets out HMRC’s position across a range of tax issues that arise in practice in relation to cryptoassets, with a specific focus on exchange tokens, which notably includes cryptocurrency. In this TAXguide, we only look at cryptocurrencies.

When considering the tax position of individuals, it is advisable to consider HMRC’s view and to make appropriate disclosures on tax returns related to the approach which has been taken.

One particularly thorny area in practice is source and situs, as cryptocurrency is typically not associated with any particular jurisdiction.  For example, the entire Bitcoin blockchain is stored on servers across the world. It could be said to be both everywhere and nowhere. This leads to obvious uncertainty for a person whose tax position depends on source of income and situs of assets, such as remittance basis users. HMRC’s position is to consider cryptocurrency (and any other cryptoasset without a distinct underlying asset) to be situated where the beneficial owner is tax resident. Advisers operating in this area will need to give careful consideration to what approach they wish to take. ICAEW does not comment further on this point in this TAXguide.

Unfortunately, following a number of high-profile exchange failures, advisers may need to consider the impact that these may have on the individual’s tax liability. Individuals can also become caught-out by scams such as a “rug-pull” or “pig butchering”. A rug-pull is where funding is sought for a project that is being developed where the funds are then siphoned off with the parties absconding with them. The unfortunately termed pig butchering is more akin to romance scams where individuals are persuaded into providing funds where the person then absconds with them.  In these events, while theft is not a disposal for tax purposes, tax advisers may consider whether a negligible value claim is appropriate.

The remainder of this TAXguide looks at the UK income tax and CGT position of individuals who own cryptocurrency directly. As noted above, it does not comment on the potential application of the remittance basis.

HMRC does not currently consider cryptocurrency to be a currency or money.

This means that neither the exemption for foreign currency used outside the UK for personal expenditure (s269, Taxation of Chargeable Gains Act 1992 (TCGA 1992)) nor the simple debt exemptions (s251, TCGA 1992) is available. It is possible this may change in the future as the technology evolves and becomes more widespread.

Working on the basis that cryptocurrency returns are taxable, the next step is to determine how profits and losses are taxable or relievable. As noted above, there are three options:

1. as trading income;
2. as employment income; or
3. as capital gains.

Each individual’s facts and circumstances must be considered when determining which tax charge applies.

HMRC considers that most individuals will fall short of meeting the badges of trade, so returns are only expected to be charged to tax as trading income in exceptional circumstances.

HMRC’s broad expectation is that miners and stakers (ie, those who are involved in the network maintenance of verifying new cryptocurrency) will most likely be within the scope of miscellaneous income, while those who purchase existing cryptocurrency will normally be within the scope of CGT.

While miners may initially be within the scope of income tax, if cryptocurrency is retained as an investment it is possible that future changes in value will be within the scope of CGT.

There are other means by which cryptocurrency can be acquired, such as airdrops and forks, which for reasons of brevity are not covered in this TAXguide.

Net income from mining activities is chargeable as miscellaneous income under s688, Income Tax (Trading and Other Income) Act 2005, (ITTOIA 2005), assuming that the facts do not indicate that this is one of the rare occasions in which the miner or staker is trading.

Gross income includes any returns the miner receives, such as fees for verifying new transactions added to the blockchain. Allowable expenses may relate, for example, to electricity costs. See example 1.

Existing cryptocurrency may be purchased in a number of ways, though it is common for this to be done through an online platform called an exchange. In such cases, it is likely that returns will not be in the nature of income and so CGT is in point.

Cryptocurrency is a chargeable asset that falls within the TCGA 1992 rules that are best known for applying to shares, (ie, the same day (s105), 30-day (s106A) and pooling rules (s104)). The reason for this is that the aforementioned sections apply to securities, which, for this purpose, include any fungible assets.

An often-overlooked complication with the pooling rules is that the assets are treated as being a single asset. This means that where pooling is applied, all the cryptoassets that are the same type are treated as a single asset regardless of where they are ‘held’ (eg, an individual may hold their bitcoin across several wallets or exchange platforms). In the case of FTX this means that if the individual had cryptoassets held in FTX and some of the same cryptoassets held outside of FTX, a negligible value claim could not be made in respect of value lost from the collapse of FTX. The application of the pooling rules may create an inequitable treatment for cryptoassets compared to other assets.

A chargeable disposal may occur whenever cryptocurrency is disposed of, whether or not cash changes hands. See example 2. In some cases, the value of cryptocurrencies may be expressed only in foreign currencies. Where applicable, the value of the cryptocurrency must be calculated in the relevant foreign currency and the foreign currency value converted into sterling. For example, had Ms B in example 2 known the value of her Cryptocurrency A expressed in US dollars, she would have needed to convert the dollar amounts on 1 January 2020 and 1 January 2024 using the exchange rates on those dates.

Finally, there may be multiple transactions, as illustrated in example 3.

This section considers where cryptoassets are lent out for a return (sometimes termed, wrongly, as interest). Where a return is made participants call this “staking”. However, this is very different from the staking above under network maintenance.

Net income from lending and staking is generally chargeable as miscellaneous income under s688, ITTOIA 2005, assuming that the facts do not indicate that the activities amount to a trade. In some cases the return could be treated as capital.

Under current rules, lending and staking activities may lead to a taxable disposal of cryptocurrency and acquisition of new cryptocurrency, even where the economic ownership of the underlying cryptocurrency is retained. HMRC is consulting on the tax treatment of lending and staking cryptocurrencies, so this area may see developments soon.

Cryptocurrency continues to evolve quickly and shows no signs of slowing down. At a high level, existing tax law can be applied to determine the income tax and CGT position of individuals. There are some areas of uncertainty where agents are seeking further clarity, notably source of income, which is not well-catered for by existing law. A final thought is that evidence of acquisition costs and selling prices may be limited, or available only for a short time, and so it is essential that records are maintained on an ongoing basis in order to prepare tax returns.

Mr A is a cryptocurrency miner. He mines by leaving his personal laptop running overnight, where it verifies transactions added to the blockchain.

In return for his efforts, Mr A received cryptocurrency worth £2,000 in the tax year.

His electricity costs increased significantly; he considers that £200 of the additional expense relates to his mining activities, giving a net return of £1,800. Mr A had a profit motive, but his minimal activity means that the actions he took fall short of meeting the badges of trade.

His £1,800 profit is therefore charged to tax as miscellaneous income.

Mr A retains the cryptocurrency he received, in the hope it will increase in value in the future. CGT will apply to any future increase in value of the cryptocurrency. Section 37, TCGA 1992 will be relevant on a future disposal of the cryptocurrency, meaning that any amounts which have been subject to income tax should not be taxed again. In effect, any uplift in value above £2,000 will be chargeable, and any decrease may be an allowable capital loss.

Ms B owns 1,000 coins of Cryptocurrency A, which she originally bought for £1,500 on 1 January 2020. She holds these in a wallet operated by an exchange, akin to holding shares in a share portfolio. On 1 January 2024, she exchanged all of her Cryptocurrency A for coins in Cryptocurrency B. She has made a chargeable disposal of Cryptocurrency A. The chargeable gain or loss must be calculated.

Let us assume that each Cryptocurrency A coin is worth £25. Her disposal proceeds are £25,000. She originally paid £1,500, and so her chargeable gain is £23,500.

Let us assume that Ms B from example 2 purchased 400 coins of Cryptocurrency A on 15 January 2024.

This is an acquisition within 30 days of a disposal, so 400 of the coins disposed of are regarded as being those purchased on 15 January 2024, with the remainder being sold from the pool.

The new Cryptocurrency A coins cost £30 each.

The net chargeable gain realised in 2023/24 is £12,100 (£14,100 - £2,000).

The pool containing the 400 remaining coins of Cryptocurrency A will be available to match to future Cryptocurrency A disposals.