How HMRC Views Cryptocurrency
HMRC does not treat cryptocurrency as money or currency. Instead, crypto assets are classified as property for tax purposes. This means that the tax rules for disposing of assets apply, and the specific tax treatment depends on the nature of the activity.
The main taxes that can apply to crypto transactions are:
- Capital Gains Tax (CGT) on the disposal of crypto assets
- Income tax on crypto received as earnings, mining, staking rewards, or airdrops
- Corporation tax for companies holding or trading in crypto assets
Capital Gains Tax on Crypto
A disposal occurs whenever you:
- Sell cryptocurrency for fiat currency (GBP, USD, etc.)
- Exchange one cryptocurrency for another (e.g., Bitcoin for Ethereum)
- Use cryptocurrency to pay for goods or services
- Give cryptocurrency to someone (other than your spouse or civil partner)
Each disposal is a chargeable event for CGT purposes. The gain or loss is calculated as the difference between the disposal proceeds and the allowable cost (what you originally paid for the crypto, including transaction fees).
CGT Rates on Crypto
Crypto gains are taxed at the ordinary Capital Gains Tax rates. The part of your gains that fits within your unused basic-rate band is taxed at the lower CGT rate, and the rest at the higher rate.
Each tax year you can also use the annual exempt amount for CGT. Gains covered by it are tax-free. The rates and the exempt amount are set by Parliament and change from time to time, so check the current figures on GOV.UK before you work out your bill.
Example
| Step | Amount |
|---|---|
| Purchase price of Bitcoin | £5,000 |
| Transaction fees on purchase | £50 |
| Allowable cost | £5,050 |
| Sale proceeds | £12,000 |
| Transaction fees on sale | £60 |
| Net proceeds | £11,940 |
| Chargeable gain | £6,890 |
The annual exempt amount for the tax year is deducted from the £6,890 chargeable gain, and any remaining gain is taxed at your CGT rate.
Cost Basis Rules
Calculating the cost basis of crypto assets follows specific share pooling rules, similar to those used for shares and securities:
The Three Matching Rules
When you dispose of crypto tokens, HMRC requires you to match the disposal against acquisitions in this order:
- Same-day rule — Match against any tokens of the same type acquired on the same day
- Bed and breakfasting rule — Match against any tokens of the same type acquired within the next 30 days
- Section 104 pool — Match against the average cost of the pooled holding of that token type
The section 104 pool is a running average cost calculation. Each time you buy more of the same token, the total cost and quantity are updated. When you sell, the proportionate average cost is deducted.
Section 104 Pool Example
| Transaction | Tokens | Price each | Total cost | Pool total tokens | Pool total cost | Average cost |
|---|---|---|---|---|---|---|
| Buy | 2 | £1,000 | £2,000 | 2 | £2,000 | £1,000 |
| Buy | 3 | £1,500 | £4,500 | 5 | £6,500 | £1,300 |
| Sell 1 | -1 | — | -£1,300 | 4 | £5,200 | £1,300 |
The gain on the sale of 1 token is: proceeds minus £1,300 (the pooled average cost).
Income Tax on Crypto
Certain crypto activities are treated as income rather than capital gains:
| Activity | Tax treatment |
|---|---|
| Mining (as a trade) | Trading income — income tax and NI |
| Staking rewards | Income tax at market value when received |
| Airdrops (received for a service) | Income tax at market value when received |
| Airdrops (unsolicited, no service) | No income tax; CGT applies on disposal |
| Crypto received as salary or wages | Employment income — PAYE and NI |
| DeFi lending interest | Income tax on interest received |
When crypto is received as income, the market value at the date of receipt becomes the acquisition cost for future CGT calculations when you later dispose of it.
Crypto-to-Crypto Exchanges
Swapping one cryptocurrency for another is a disposal of the first and an acquisition of the second. You must calculate the gain or loss on the crypto you are disposing of based on its sterling value at the time of the exchange.
This includes:
- Trading Bitcoin for Ethereum
- Swapping tokens on decentralised exchanges
- Converting crypto to stablecoins (USDT, USDC, etc.)
- Using crypto to buy NFTs
Each swap is a separate chargeable event that must be recorded and reported.
DeFi and Staking
HMRC has published specific guidance on decentralised finance (DeFi) transactions:
- Lending crypto through DeFi protocols — if beneficial ownership transfers, this is a disposal for CGT; the return is income
- Liquidity provision — adding tokens to a liquidity pool may constitute a disposal depending on the terms
- Staking — rewards received are generally taxable as miscellaneous income at the market value when received
- Yield farming — treated similarly to staking; rewards are income and subsequent disposal triggers CGT
The tax treatment depends on whether beneficial ownership of the tokens changes hands. If it does, a disposal has occurred.
Losses
Capital losses on crypto disposals can be:
- Set against other capital gains in the same tax year
- Carried forward to future tax years indefinitely
To claim a loss, you must report it to HMRC within four years of the end of the tax year in which the loss arose.
If tokens become worthless (e.g., a project collapses or an exchange is hacked), you can make a negligible value claim to crystallise the loss without an actual disposal.
Record-Keeping
HMRC requires detailed records of all crypto transactions, including:
- The type of crypto asset and the quantity
- Dates of acquisition and disposal
- Sterling value at the date of each transaction
- Transaction fees and exchange commissions
- Wallet addresses and exchange accounts used
- The purpose of each transaction (investment, payment, mining reward, etc.)
Records must be kept for at least five years after the 31 January filing deadline for the relevant tax year. Given the complexity of crypto transactions, using dedicated crypto tax software (such as Koinly, CoinTracker, or CryptoTaxCalculator) can automate the pooling calculations and produce reports suitable for self-assessment.
Reporting and Payment
Crypto gains and income are reported through self-assessment:
| Type of income/gain | Where to report |
|---|---|
| Capital gains on crypto | Capital gains pages (SA108) |
| Mining income (trading) | Self-employment pages (SA103) |
| Staking/DeFi income | Additional information pages (SA101) |
| Crypto received as employment income | Already reported through PAYE by employer |
The filing deadline for online self-assessment is 31 January following the end of the tax year. Payment of any tax due is also due by this date.
Transfers Between Spouses
Transfers of crypto assets between spouses or civil partners are treated as taking place at no gain, no loss for CGT purposes. This means:
- No CGT is triggered on the transfer
- The receiving spouse takes over the original cost basis
- This can be used for tax planning by transferring assets to a spouse with a lower marginal tax rate or unused annual exempt amount
This relief does not apply to unmarried partners or other family members.
Common Mistakes
- Forgetting that crypto-to-crypto swaps are disposals — Every exchange triggers a CGT calculation
- Not tracking the sterling value at the time of each transaction — Historical prices are needed for every buy, sell, and swap
- Ignoring staking and airdrop income — These are taxable events even if no fiat currency is received
- Failing to report losses — Unreported losses cannot be carried forward; they must be claimed within four years