BLOG
CRYPTO-TAXES
The Ultimate UK Crypto Tax Guide

The Ultimate UK Crypto Tax Guide

16 Jan 2025, 14:26 30 min. to read Igor Barden

What Are Crypto Assets and How Do They Differ from Fiat Currencies?

What Are Crypto Assets?

Crypto assets are digital tokens that are intangible yet recognized as chargeable assets under UK tax law. According to HMRC, a token qualifies as a chargeable asset if it:

Can be owned.
Has a value that can be realized, such as being sold or exchanged.

HMRC’s View on Crypto Assets

HMRC generally considers the buying and selling of crypto assets by individuals to be investment activity, rather than a trade or business. This distinction is crucial because investment activity triggers Capital Gains Tax (CGT) on any profits realized from disposals.

Types of Crypto Assets

There are thousands of cryptocurrencies and digital tokens, which fall into two main categories:

Fungible Tokens:
- These tokens are interchangeable and have equal value within their type.
- Examples:
  - Bitcoin (BTC): Often viewed as digital gold and used as a store of value or medium of exchange.
  - Ethereum (ETH): Known for its programmable blockchain and support for decentralized applications.
  - Stablecoins (e.g., USDT, USDC): Cryptocurrencies pegged to the value of fiat currencies like the US Dollar, offering price stability and used frequently for transactions and as a hedge against volatility.
- Similar to fiat currencies like the Pound (£), these tokens have uniform value, making them fungible.
Non-Fungible Tokens (NFTs):
- NFTs are unique digital assets with specific attributes and digital identifiers.
- Examples:
  - Digital artwork, collectibles, or virtual real estate.
- Unlike fungible tokens, every NFT has its own distinct value and cannot be exchanged on a one-to-one basis.

How Crypto Differs from Fiat Currencies

While crypto assets share some attributes with fiat currencies, such as being used for payments and having fluctuating values, they are not considered money by HMRC.

Key differences include:

Legal Tender Status:
- Fiat currencies like GBP are backed by governments and central banks, making them official legal tender.
- Cryptocurrencies are decentralized, with no central authority backing their value.
Physical Form:
- Fiat currencies can exist as tangible cash (notes and coins), while crypto assets exist solely in digital form.
Volatility:
- Cryptocurrencies are significantly more volatile, with values that can rise or fall dramatically in short periods.
Ownership and Transactions:
- Crypto ownership is linked to private keys and blockchain wallets, while fiat is often held in traditional bank accounts.

Examples: Comparing Crypto Assets and Fiat Currencies

Bitcoin as an Investment Asset
- Alice buys 1 BTC for £20,000. Over six months, its value increases to £30,000.
- If she sells it, the £10,000 profit is a capital gain, and she must report it for CGT.
NFT as a Unique Asset
- Bob buys an NFT artwork for £5,000 and later sells it for £7,500.
- The £2,500 profit is also subject to CGT.
Fiat Currency Example
- Carol holds £5,000 in her bank account. The value of £1 remains stable unless affected by inflation.
- No capital gains tax applies to holding or using GBP for purchases.

Why HMRC Treats Crypto Assets Differently

Despite their ability to function as a medium of exchange and a store of value, crypto assets are not treated as currency by HMRC. This classification aligns them more closely with investments like stocks and shares, which are subject to CGT when sold or exchanged.

By understanding the nature of crypto assets and how they differ from fiat currencies, investors can better navigate their tax obligations and remain compliant with HMRC guidelines.

Do You Have to Pay Taxes on Your Crypto?

Yes, you do. Crypto assets are subject to taxation in the UK, depending on how they are acquired and used.

Capital Gains Tax (CGT) on Investment Activity

If you buy and sell crypto as an investment, any profits (capital gains) you make are taxed under the Capital Gains Tax (CGT) regime. You are required to pay CGT if your total capital gains for the tax year exceed the annual CGT exemption (commonly referred to as the capital gains allowance).

For example:

If you bought Bitcoin for £5,000 and later sold it for £15,000, your profit of £10,000 would be a taxable capital gain.

Income Tax on Crypto Rewards

In addition to CGT, Income Tax applies to crypto rewards earned through activities such as:

Staking: Receiving rewards for locking up your tokens in a staking mechanism.
Mining: Generating new crypto tokens by validating blockchain transactions.

Income earned from these activities must be reported as miscellaneous income on your tax return, based on the GBP value of the rewards at the time they are received.

For example:

If you earned 2 ETH through staking, valued at £1,500 each at the time of receipt, the total taxable income is £3,000.
If you later sell the ETH for more than its initial value, the profit is subject to CGT.

Disposals and Capital Gains Tax

In the UK, individuals must calculate their gain or loss when they dispose of crypto tokens to determine if they owe Capital Gains Tax (CGT). A disposal occurs in various scenarios, and understanding what constitutes a disposal is critical for accurate tax reporting.

What Counts as a Disposal?

HMRC considers the following actions as disposals:

Selling Tokens for Money
- Example: You sell 2 BTC for £40,000. The sale is a taxable disposal, and you must calculate the gain or loss by comparing the sale price to the cost of acquiring the BTC.
Exchanging Tokens for Another Token
- Example: You trade 1 ETH (worth £2,000) for 0.05 BTC (worth £2,000). Although no fiat currency is involved, this exchange is a taxable disposal of ETH, and the gain or loss must be calculated.
Using Tokens to Pay for Goods or Services
- Example: You pay 0.5 BTC (worth £10,000) to buy a car. This counts as a disposal, and you need to calculate the gain or loss on the 0.5 BTC.
Gifting Tokens
- Example: You gift 500 ADA to a friend when its market value is £1,000. This is treated as a disposal, and you are taxed on the gain or loss based on the market value of the gift. Exception: Gifts to a spouse or civil partner are not taxable.

What Does NOT Count as a Disposal?

The following actions do not trigger CGT:

Transferring Tokens Between Wallets You Own
- Example: Moving 1 BTC from your exchange account to a hardware wallet. Since you retain ownership, this is not a disposal.
Using Mixers or Tumblers for the Same Tokens
- Example: You use a mixer and receive back the same type of tokens you deposited. This is not a disposal.

Special Disposal Rules

Giving Away Tokens
If you gift tokens (other than to a spouse or civil partner), HMRC treats it as if you sold them for their market value in GBP.
- Example: You gift 1 ETH (market value £2,000) to a friend. HMRC considers this a disposal worth £2,000, even though you received nothing in return.
Donating Tokens to Charity
Donations to a registered charity are exempt from CGT unless:
- The donation is a tainted donation.
- The tokens are disposed of for more than their acquisition cost.
- Example: If you donate tokens worth £5,000 to charity and acquired them for £3,000, the £2,000 gain is exempt from CGT.
Income Tax Impact
If Income Tax has already been charged on received tokens (e.g., staking rewards), this amount reduces the consideration for CGT purposes under section 37 of TCGA 1992.

Allowable Expenses for Disposals

When calculating gains or losses, you can deduct specific allowable expenses. These are defined under section 38 of the Taxation of Chargeable Gains Act 1992 and include:

The purchase price of the tokens in GBP.
Transaction fees for adding the transaction to the blockchain.
Costs of advertising to find a buyer or seller.
Professional fees, such as drawing up contracts or valuations.

Examples of Allowable and Non-Allowable Costs

Situation	Allowable for CGT?
Purchasing tokens with GBP	Yes – considered the cost of acquisition.
Paying blockchain fees for transactions	Yes – included as part of the cost.
Exchanging tokens (e.g., ETH for BTC)	Yes – costs must be apportioned.
Transferring tokens between your own wallets	No – not considered a disposal.
Depositing/withdrawing fiat currency (GBP)	No – fiat is not a chargeable asset.

Exchange Fees

Crypto transactions often incur fees charged by exchanges. HMRC allows deductions for some, but not all, exchange fees:

Buying Tokens with Fiat (GBP or Other Currencies)
- Fees are allowable as acquisition costs.
- Example: You buy 100 ADA for £200, incurring a £5 fee. The total allowable cost is £205.
Exchanging Tokens (e.g., BTC for ETH)
- Fees should be apportioned between the asset disposed of and the asset acquired on a just and reasonable basis (TCGA92/S52(4)). You can accept that apportioning this type of fee equally between the assets disposed of and the assets acquired (that is a 50/50 split) is just and reasonable in these circumstances. A different approach could be applied, but this would be considered by HMRC on a case by case basis.
- Example: You trade 1 BTC for 20 ETH, paying a £10 fee.
  - £5 is deductible as part of the BTC disposal.
  - £5 is added to the acquisition cost of the ETH.
Selling Tokens for Fiat (e.g., GBP)
- Fees are allowable as disposal costs.
- Example: You sell 1 BTC for £30,000 and pay a £100 fee. Your taxable gain is calculated after deducting the fee.
Withdrawing Fiat or Tokens
- Fees for withdrawing fiat or tokens are generally not allowable.

Examples: Calculating CGT on a Disposal with Fees

Scenario:

You sell 10,000 tokens for £5,000.
You paid £3,000 for the tokens, with a £50 fee at the time of purchase.
You incurred a £20 fee for the sale.

Calculation:

Disposal Value: £5,000.
Allowable Costs:
- Purchase cost: £3,000.
- Purchase fee: £50.
- Sale fee: £20.
Taxable Gain: £5,000 - (£3,000 + £50 + £20) = £1,930.

Calculating Capital Gains Tax (CGT): Pooling and Matching Rules

What Is Pooling?

Pooling simplifies CGT calculations by aggregating assets of the same type into a Section 104 Pool. This approach eliminates the need to track individual tokens, provided they are fungible assets that are bought, sold, or exchanged without being uniquely identifiable.

Please note, that HMRC treats all holdings of the same cryptocurrency (e.g., BTC, ETH) as one combined “pool” regardless of how many wallets you use.

For example:

If you purchase 1 BTC for £20,000 and later purchase another 1 BTC for £25,000, the combined cost forms a single pool of £45,000 for 2 BTC.
If you then sell 1 BTC, the allowable cost for CGT purposes will be calculated based on the pooled average cost: £45,000 ÷ 2 = £22,500 per BTC.

Section 104 Pooling Rules

Under Section 104 of the Taxation of Chargeable Gains Act 1992 (TCGA92), fungible tokens like Bitcoin and Ethereum must be pooled. Each type of token requires its own separate pool. For example:

If you own Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), you would maintain three separate pools—one for each token type.
The pooled allowable cost of each pool will adjust with every acquisition, disposal, or part-disposal of that token type.

Non-Fungible Tokens (NFTs)

NFTs are unique by nature and are not pooled. Each NFT is treated as a separately identifiable asset, meaning no pooling or matching rules apply to them.

Example:

If you buy a digital artwork NFT for £5,000 and later sell it for £7,500, you calculate your CGT gain directly: £7,500 - £5,000 = £2,500.

Matching Rules for Acquisitions and Disposals

In some cases, tokens are matched to specific acquisitions outside the Section 104 Pool. This prevents individuals from using strategies like “bed-and-breakfasting” to manipulate taxable gains. Matching rules include:

1. Same-Day Rule (TCGA1992/S105)

The same-day rule states that all tokens of the same class acquired by the same person on the same day are treated as though they were acquired by a single transaction. Similarly, all tokens disposed of on the same day are treated as a single transaction. This means that when you have multiple buys and sells on the same day:

All purchases are combined into one synthetic purchase with an averaged cost basis
All sales are combined into one synthetic disposal with an averaged selling price

Under HMRC’s share matching hierarchy, assets acquired and disposed of on the same trading day must be matched together first, prior to any remaining balance being allocated to the Section 104 pool or considered under the 30-day rule.

Example:

You sell 5 ETH in the morning for £10,000 and later buy 3 ETH in the afternoon for £6,000.
The 3 ETH acquired are matched to the 5 ETH sold, reducing the number of tokens treated as disposed of under the Section 104 Pool to 2 ETH.

Key Points:

If more tokens are acquired than sold on the same day, the excess tokens go into the Section 104 Pool.
If more tokens are sold than acquired, the unmatched tokens are subject to the 30-Day Rule.

2. 30-Day Rule (TCGA1992/S106A)

Tokens bought within 30 days of a disposal are matched to the earlier disposal, in chronological order, before entering the Section 104 Pool.

Example:

You sell 4 BTC on March 1 for £100,000.
On March 15, you buy 2 BTC for £50,000.
The 2 BTC acquired are matched to the disposal, reducing the number of tokens treated as disposed of under the Section 104 Pool to 2 BTC.

Key Points:

The 30-Day Rule ensures that newly acquired tokens are used to calculate CGT gains or losses on recent disposals.
If acquisitions exceed disposals within the 30-day window, the excess tokens go into the Section 104 Pool.

Practical Example: Pooling and Matching

Scenario:

You start the tax year with 5 BTC in your Section 104 Pool at a pooled cost of £100,000 (£20,000 each).
On June 1, you sell 2 BTC for £60,000.
On June 10, you buy 1 BTC for £25,000.

Step 1: Apply the Same-Day Rule

Not applicable, as no transactions occurred on the same day.

Step 2: Apply the 30-Day Rule

The BTC purchased on June 10 is matched to the sale on June 1.

Step 3: Calculate the Remaining Pool

Disposal (June 1): 1 BTC is matched under the 30-Day Rule.
Remaining Pool:
- Start: 5 BTC at £100,000.
- Sold under the pool: 1 BTC = £20,000.
- End: 4 BTC at £80,000.

Blockchain Fees and Capital Gains Tax (CGT)

Most crypto transactions require payment of a fee, often in tokens, to process and confirm the transaction. These fees must be accounted for in Capital Gains Tax (CGT) computations because they affect both the cost of disposal and acquisition.

How to Treat Blockchain Fees for CGT Purposes

When transaction fees are paid in tokens, they are considered a cost of the disposal. However, the tokens used as fees are also treated as a disposal in their own right.

Under TCGA92/S17(1)(b), the market value (MV) of the tokens given as a fee is used to calculate both the consideration and the allowable cost of the service rendered.

For CGT purposes, fees are included as follows:

Consideration: Equal to the market value (MV) of the token given as a fee.
Allowable Costs: Equal to the MV of the token, allocated using CGT matching rules (same-day rule, 30-day rule, or Section 104 Pool).

Practical Example: Blockchain Fees in Action

Scenario:
Terri holds 10,000 tokens in her Section 104 Pool, acquired for a total cost of £20,000. She sells 1,000 tokens for £5,000, paying a 0.1% transaction fee (1 token) valued at £5. We need to calculate her capital gain, accounting for the same-day rule and the impact of the fee.

Step 1: Pre-Sale Pool Details

Tokens Held: 10,000.
Pooled Cost: £20,000.
Pooled Cost per Token: £20,000 ÷ 10,000 = £2 per token.

Step 2: Individual Computations

A. Disposal of 1,000 Tokens

Consideration: £5,000.
Allowable Cost:
- For 1,000 tokens: 1,000 × £2 = £2,000.
- Plus the fee paid in GBP: £5.

Gain on Disposal:

Consideration: £5,000.
Less Allowable Costs: £2,000 (tokens) + £5 (fee paid in GBP) = £2,005.
Gain: £5,000 - £2,005 = £2,995.

B. Disposal of 1 Token Fee

Consideration: £5 (market value of the token used as the fee).
Allowable Cost:
- For 1 token: 1 × £2 = £2.

Gain on Fee Disposal:

Consideration: £5.
Less Allowable Cost: £2.
Gain: £5 - £2 = £3.

Step 3: Combined Computation (Same-Day Rule)

Since the disposal of the 1,000 tokens and the 1 token fee occurs on the same day and involves the same type of token, the same-day rule applies. Both disposals are treated as a single transaction.

Corrected Combined CGT Calculation:

Total Consideration: £5,000 (tokens) + £5 (fee) = £5,005.
Total Allowable Costs: £2,000 (tokens) + £5 (fee paid in GBP) + £2 (fee token cost) = £2,007.
Total Gain: £5,005 - £2,007 = £2,998.

Special Cases: Fees in Different Tokens

When fees are paid in a different type of token (e.g., paying ETH fees for a BTC transaction), separate computations are required for each token type.

Example: If Terri used 0.01 ETH as the fee for the BTC transaction, she would need to calculate the disposal of the 0.01 ETH separately, based on its market value and allowable cost.

Simplified Alternative

Some individuals exclude the market value of the fee from their calculations and only include the fee’s allowable cost. While this is technically incorrect, HMRC allows this approach if the gain or loss is calculated accurately.

Example Using Simplified Method:

Consideration: £5,000 (ignoring the £5 fee).
Allowable Costs: £2,002 (including the allocated cost of the 1 token fee).
Gain: £2,998.

Key Takeaways

Blockchain fees affect both the disposal of tokens and the calculation of allowable costs.
Fees must be valued at their market value in GBP and treated as a disposal.
Use HMRC’s matching rules (same-day, 30-day, or pooling) to allocate costs accurately.
Ensure all fees are properly accounted for to avoid errors in your CGT calculations.

Please refer to our Case Study: How To Calculate UK Crypto Trading Gains In 2025 for more complex example.

Airdrops

An airdrop refers to the distribution of free tokens to individuals, often as part of a marketing campaign, advertising strategy, or community reward initiative. Airdrops can be delivered automatically to eligible recipients based on specific criteria, such as holding certain tokens or registering for the airdrop.

Key Characteristics of Airdrops

Independent Infrastructure:
- Airdropped tokens typically operate on their own infrastructure, such as a smart contract, blockchain, or distributed ledger, independent of any existing crypto asset.
Allocation Examples:
- Tokens may be distributed to promote a new cryptocurrency project.
- Individuals may receive tokens as a reward for holding a related token or for simply registering for eligibility.

Taxation of Airdrops

Income Tax on Airdrops

Income Tax may or may not apply to airdropped tokens, depending on the circumstances under which they are received:

No Income Tax
- Tokens received without doing anything in return, such as promotional giveaways with no conditions, are generally not taxable as income.
- Airdrops are not subject to Income Tax if they are:
  - Received personally, not as part of a trade or business.
  - Unrelated to any service, activity, or condition.
Subject to Income Tax
Airdrops are taxable as miscellaneous income or trade receipts if they are provided:
- In return for services: For example, as part of a promotional or affiliate campaign.
- As part of a business: For example, if the individual operates a trade or business involving crypto tokens or mining.

Example:

Alice receives 50 tokens through an airdrop tied to her promotion of a blockchain project. The tokens are valued at £10 each at the time of receipt.
- Alice must declare £500 as taxable income under miscellaneous income or trade receipts.

Capital Gains Tax (CGT) on Airdrop Disposals

Regardless of whether Income Tax applies at the time of receipt, the disposal of airdropped tokens may create a chargeable gain for Capital Gains Tax.

Rules for Disposal:

Section 104 Pooling:
- If the airdrop creates a new type of token, it will form its own Section 104 Pool.
- If the individual already holds tokens of the same type, the airdropped tokens are added to the existing pool.
Interaction of Income Tax and CGT:
- When changes in the token’s value are accounted for under trade profits (Income Tax), these take priority over CGT.

Example:

Bob receives 100 tokens via an airdrop. At receipt, the tokens are valued at £5 each, forming a pool of £500.
Bob later sells the tokens for £1,000.
- Capital Gain: £1,000 (disposal value) - £500 (acquisition cost) = £500 gain.

Record-Keeping:

Track the value of airdropped tokens in GBP at the time of receipt.
Record any income declared or pooled costs for CGT calculations.

Stolen or Lost Crypto

Stolen Crypto

HMRC does not treat the theft of crypto assets as a disposal. This is because the individual still legally owns the stolen tokens and retains the right to recover them.

Key Implication:

Victims of theft cannot claim a Capital Gains Tax (CGT) loss on the stolen assets.

Unfulfilled Purchases

If an individual contracts to purchase crypto tokens but:

Fails to Receive the Tokens:
- No CGT loss can be claimed, as the transaction did not result in ownership of any assets.
Receives Worthless Tokens:
- If tokens received are already worthless at the time of acquisition, a negligible value claim is not allowed.
- However, if tokens later become worthless, a negligible value claim may be possible (explained below).

Lost Private Keys

If an individual loses access to their tokens by misplacing their private key (e.g., by discarding a piece of paper or device storing the key), HMRC does not treat this as a disposal for CGT purposes.

Reason:

The private key still exists within the cryptographic system, and the tokens remain on the blockchain. Therefore, the individual retains ownership, even if access is lost.

Negligible Value Claims

A negligible value claim can be made if it can be demonstrated that:

There is no realistic prospect of recovering the private key or accessing the tokens.
The tokens have become worthless after being acquired.

If HMRC accepts the claim:

The individual is treated as if they disposed of and re-acquired the tokens at their negligible value.
This allows the individual to crystallize a capital loss for CGT purposes.

Example:

An individual loses access to 1 BTC purchased for £10,000.
If HMRC accepts a negligible value claim, the BTC is treated as disposed of for £0 and immediately reacquired for £0.
The individual can then claim a capital loss of £10,000 on their tax return.

Key Considerations

Evidence of Worthlessness:
- HMRC requires evidence that the tokens are permanently inaccessible or without value.
Limitations of Negligible Value Claims:
- Claims cannot be made for tokens that were already worthless when acquired.
Disposal by Other Means:
- Even if a negligible value claim is denied, the individual may still dispose of the tokens by other means to crystallize a capital loss.

Gifting Cryptocurrency

Gifting Crypto to Others

When you gift cryptocurrency to anyone other than your spouse or civil partner, it is treated as a taxable disposal. For tax purposes, the gift is valued at its full market value at the time of the transfer, regardless of whether you receive anything in return.

Example: You gift 1 BTC to a friend when its market value is £30,000. HMRC treats this as a disposal, and you must calculate Capital Gains Tax (CGT) based on the £30,000 value, even though no payment was received.

Gifting Crypto to Your Spouse or Civil Partner

Gifting tokens to your spouse or civil partner is considered tax-free, and there are no limits on the amount you can transfer. This can be an excellent tax optimisation strategy, as both individuals can utilise their full capital gains allowance.

How It Works:

The gift is treated as a disposal for the giver and an acquisition for the receiver, but the transaction occurs on a “no-gain, no-loss” basis.
This means the gift is tax-free, and no CGT liability arises at the time of transfer.

To qualify for spousal gifting exemptions the parties must:

Be married or in a civil partnership.
Live together at some point during the tax year in which the gift is made.

When the recipient later disposes of the gifted crypto, they inherit the acquisition cost from the giver for CGT calculations.

Example:

Alex buys 10 ETH for £10,000 and gifts them to their spouse, Jamie, when the ETH is valued at £25,000.
The gift is tax-free. Jamie’s acquisition cost for CGT purposes is £10,000 (Alex’s original purchase price).
If Jamie later sells the ETH for £30,000, their taxable gain is £30,000 - £10,000 = £20,000.

Receiving Gifted Crypto

Receiving cryptocurrency as a gift is not a taxable event for the recipient. However, when the recipient later disposes of the gifted crypto, they will be liable for CGT on any gains made. The acquisition cost for CGT purposes depends on the nature of the gift:

From Spouse/Civil Partner: The recipient inherits the giver’s original acquisition cost.
From Others: The acquisition cost is the market value of the crypto on the date of the gift.

Example:

You receive 100 ADA as a gift from a friend, valued at £1,000 on the day of receipt.
You later sell the ADA for £1,500.
Your taxable gain is £1,500 - £1,000 = £500.

Staking

Staking involves locking up exchange tokens as part of a blockchain’s consensus mechanism to validate transactions and earn rewards. These rewards are often newly minted tokens or additional units of the staked token.

Tax Treatment of Staking Rewards

The taxation of staking rewards depends on whether the activity qualifies as a trade. HMRC evaluates this based on factors such as:

Degree of activity: The frequency and intensity of staking operations.
Organisation: Whether the activity is systematically planned and managed.
Risk: The financial risks involved in staking.
Commerciality: Whether the activity is conducted in a commercial manner.

If staking is deemed a taxable trade, the rewards are treated as trade receipts and taxed as part of trading income.

If the activity does not qualify as a trade, staking rewards are taxed as miscellaneous income, subject to Income Tax.

Income Tax on Staking Rewards

Staking rewards are taxable at their pound sterling value on the date they become receivable, regardless of whether you choose to withdraw or reinvest them.

Receivable Rewards: Rewards are considered receivable when they are credited to your account and are accessible, even if you haven’t withdrawn them.
Auto-Compounding Rewards: In cases where rewards are automatically reinvested (e.g., auto-compounding protocols), the taxable value is calculated when the rewards are credited, not when they are withdrawn.

Example:

You earn 10 tokens as staking rewards on July 1, 2024, when each token is worth £20.
Even if you don’t withdraw the tokens, you must declare £200 (£20 × 10) as miscellaneous income for the 2024/2025 tax year.

Capital Gains Tax (CGT) on Staking Rewards

If you retain staking rewards and later sell or dispose of them, you may also incur a Capital Gains Tax (CGT) liability.

The acquisition cost for CGT purposes is the market value of the rewards on the date they were taxed as income.
When the tokens are sold or exchanged, CGT is calculated on the difference between the disposal value and the acquisition cost.

Example:

You earned 10 tokens as staking rewards on July 1, 2024, valued at £200 in total.
On January 1, 2025, you sell the tokens for £300.
Your capital gain is £300 (sale price) - £200 (acquisition cost) = £100 gain.

Allowable Deductions

Allowable expenses, such as network fees or other staking-related costs, may reduce the taxable amount of miscellaneous income.
If applicable, the trading allowance (currently £1,000) may also reduce the amount chargeable to Income Tax.

Please Note!

The tax treatment of staking rewards and activities depends on the specific staking method and whether beneficial ownership is transferred. Staking generally avoids CGT implications unless rewards are disposed of later, while pooled staking with liquid tokens might triggers immediate CGT due to token swaps. Pleaser refer to our comprehensive Ethereum Staking Explained guide.

Mining

Mining involves using computing power to validate blockchain transactions and add new blocks to the blockchain. Miners are rewarded with cryptocurrency tokens, which are subject to taxation in the UK. The tax treatment depends on whether mining is considered a hobby or a business activity.

1. Mining as a Hobby

In the UK, cryptocurrency mining is generally considered a hobby for most individual miners. Income generated from mining must be reported as miscellaneous income on your Self-Assessment Tax Return.

Income Value:
The taxable income is the sterling value of the tokens at the time they are received.
Allowable Expenses:
- Certain expenses, such as electricity and internet costs related to mining activity, can be deducted.
- Capital expenses, such as the cost of mining hardware or rigs, cannot be deducted under miscellaneous income rules.
Capital Gains Tax (CGT):
When tokens earned through mining are later sold or exchanged, they are subject to CGT. The taxable gain is calculated based on the difference between the value at the time of receipt and the value at disposal.

Example (Hobby Mining):

Sarah mines 0.5 ETH on May 1, 2024, when the market value is £1,000.
- She declares £1,000 as miscellaneous income for the 2024/2025 tax year.
On August 1, 2025, she sells the 0.5 ETH for £1,500.
- Capital Gain = £1,500 (disposal value) - £1,000 (acquisition value) = £500 gain, which is subject to CGT.

2. Mining as a Business

Mining can be classified as a business activity if it is conducted on a large scale, with a clear intent to generate profit. Factors considered by HMRC include:

The degree of activity (e.g., operating multiple mining rigs).
The level of organisation and systemization.
The commerciality and financial risks involved.

In this case:

Income: Mining rewards are treated as trading income and are subject to Income Tax.
Allowable Expenses:
- Costs such as electricity, repairs, and hardware purchases (capital expenses) can be deducted as business expenses.
- Depreciation of mining equipment may also be claimed.

Example (Business Mining):

John operates a mining farm with multiple rigs, earning 5 BTC over the course of the year, valued at £150,000.
- He declares £150,000 as trading income and deducts allowable expenses, such as £50,000 for hardware and £20,000 for electricity.
His taxable income is £150,000 - £70,000 = £80,000, which is subject to Income Tax and National Insurance contributions.

Key Considerations for Hobbyists and Businesses

Classification Matters:
- Hobbyists cannot deduct capital expenses (e.g., mining hardware).
- Businesses can deduct a wider range of expenses, but are subject to stricter reporting requirements.
Record-Keeping:
- Maintain detailed records of all tokens mined, including:
  - Dates of receipt.
  - GBP value at the time of receipt.
  - Costs associated with mining activity.
CGT on Disposal:
- Both hobbyists and businesses must account for CGT when disposing of mined tokens, but the acquisition value differs:
  - Hobbyists: Acquisition value is the sterling value at the time the tokens were taxed as miscellaneous income.
  - Businesses: Acquisition value is based on the token’s recorded trading income value.

Example Comparison: Hobby vs. Business

Scenario:

Alex mines 2 ETH on July 1, 2024, valued at £3,000.
On December 1, 2024, he sells the 2 ETH for £4,000.

Hobbyist:

Declares £3,000 as miscellaneous income for 2024/2025.
Pays CGT on £1,000 (£4,000 disposal value - £3,000 acquisition value).

Business:

Declares £3,000 as trading income for 2024/2025.
Deducts business expenses (e.g., electricity).
Pays CGT on £1,000 (£4,000 disposal value - £3,000 acquisition value) if applicable.

Closing Remarks

The tax environment for crypto assets is complex and constantly evolving, with new regulations and interpretations emerging regularly. Staying informed and compliant can feel overwhelming, but proper guidance and the right tools can make the process manageable.

We are committed to keeping this guide up-to-date with the latest HMRC rules and recommendations. Be sure to check back regularly for updates and refinements as the crypto tax landscape continues to develop.

To simplify your tax calculations and ensure compliance, consider using specialized crypto tax tools like DeCrypto.tax. These tools can help you accurately track your transactions, calculate your tax obligations, and generate HMRC-compliant reports with ease.

Stay informed, stay compliant, and let DeCrypto.tax handle the heavy lifting. 🚀