UK Crypto Tax: How HMRC Taxes Cryptocurrency

HMRC’s View on Cryptocurrency

HMRC does not treat cryptocurrency as money or currency. Instead, cryptoassets are treated as property — and you may owe tax when you dispose of them.

The tax you pay depends on what you’re doing with crypto:

• Buying and holding: No tax (just owning crypto is not taxable)
• Selling crypto for pounds: Capital Gains Tax on any profit
• Trading one crypto for another: Capital Gains Tax
• Using crypto to buy goods or services: Capital Gains Tax
• Mining, staking, or earning crypto: Income Tax
• Receiving airdrops: Income Tax (usually)
• DeFi lending and rewards: Income Tax and/or Capital Gains Tax

The key distinction is between investors (most people) and traders (people buying and selling frequently as a business). HMRC will look at factors like frequency, volume, and commercial intent to decide which category you fall into.

Capital Gains Tax (CGT)

Capital Gains Tax applies when you dispose of crypto. A disposal includes:

• Selling crypto for GBP
• Trading one crypto for another (e.g., Bitcoin for Ethereum)
• Using crypto to pay for goods or services
• Gifting crypto to someone (other than a spouse or civil partner)

CGT Allowance

The annual CGT allowance for 2024/25 is £3,000. This means the first £3,000 of gains each tax year are tax-free. This allowance dropped from £6,000 in 2023/24 and £12,300 in 2022/23.

CGT Rates

Your CGT rate depends on your Income Tax band:

Example: You bought Bitcoin for £5,000 and sold it for £15,000. Your gain is £10,000. After the £3,000 allowance, you have £7,000 taxable. If you’re a higher-rate taxpayer, you owe 24% × £7,000 = £1,680.

How to Calculate Gains

Work out the gain per transaction:

1. Proceeds: What you sold it for (in GBP at the time)
2. Cost basis: What you originally paid (including fees)
3. Gain: Proceeds minus cost basis
4. Apply allowance: First £3,000 of total gains are tax-free

Income Tax on Crypto

Income Tax applies when you receive crypto as income. This covers:

Mining

If you mine crypto as a hobby, the value of coins received is taxed as income at your marginal rate. If mining is your main business activity, HMRC may treat it as a trade.

Staking

Earning rewards from staking (e.g., on Ethereum 2.0, Solana, or Cardano) is taxed as income. The value is the GBP equivalent at the time you receive it.

Airdrops

Free tokens distributed to holders are generally taxed as income if you receive them as a reward or incentive. If they arrive with no action required and no expectation, they may be capital in nature instead.

DeFi Rewards

Interest earned from DeFi protocols (lending, liquidity provision) is taxed as income.

Income Tax Rates

Your crypto income is added to your other income and taxed at your marginal rate:

Important: You’re taxed on the GBP value at the time you receive the crypto, not when you sell it later. If the crypto then drops in value before you sell, you may owe income tax on the original amount even if you ultimately sell for less.

Pool Accounting

HMRC requires a specific method for tracking crypto costs. You can’t use FIFO (first in, first out) or LIFO (last in, first out) as some other countries do. Instead, HMRC uses a share pooling system with two special rules.

Same-Day Rule

If you buy and sell crypto on the same day, those transactions are matched together first. Any gain or loss is calculated immediately, and those coins don’t enter your pool.

Example: Buy 1 ETH at £2,000 and sell 1 ETH at £2,200 on the same day. Gain of £200 — taxed immediately under CGT.

Bed and Breakfasting Rule (30-Day Rule)

If you sell crypto and then buy the same crypto within 30 days, the reacquired coins are matched against the sale. You can’t create a loss just to reinvest immediately.

Example: Sell 0.5 BTC at £30,000 on 1 March. Buy 0.5 BTC at £28,000 on 10 March. The sale and purchase are matched — you have a £2,000 gain, not a £2,000 loss.

Share Pooling

After applying the same-day and 30-day rules, remaining transactions go into a pool. Each crypto you own has its own pool. The pool has a single average cost basis:

1. Calculate total cost of all coins in the pool
2. Divide by total number of coins in the pool
3. This gives you the average cost per coin
4. When you sell, use this average to calculate the gain

Example:

• Buy 2 ETH at £2,000 each = £4,000 total (pool average: £2,000)
• Buy 1 ETH at £3,000 = £3,000 added to pool
• Pool now: 3 ETH with total cost £7,000 (average: £2,333.33)
• Sell 1 ETH at £3,500: gain = £3,500 – £2,333.33 = £1,166.67

Reporting Crypto to HMRC

You report crypto gains and income through the Self Assessment tax return.

Who Must File

You must file a tax return if:

• Your total capital gains exceed £3,000 in the tax year
• You have crypto income (mining, staking, etc.) that needs declaring
• Your total income exceeds £150,000
• You have other reasons to file (self-employment, rental income, etc.)

Even if your gains are below £3,000, you should keep records in case HMRC queries you.

What to Include

• Total gains and losses from crypto disposals
• Crypto income (mining, staking, airdrops, DeFi)
• Which pool each crypto belongs to
• Date of acquisition, date of disposal, and GBP value at each

Record-Keeping

HMRC expects you to keep records for at least 6 years. For each transaction, keep:

• Date and time of transaction
• Type of crypto
• Amount of crypto
• GBP value at the time
• Fees paid
• Reason for the transaction (sale, trade, spend, etc.)
• Wallet addresses involved

DeFi Taxation

Decentralised Finance (DeFi) adds complexity because multiple transactions can happen from a single action.

Lending Crypto

When you lend crypto through a DeFi protocol, HMRC may treat this as a disposal. You’re giving up control of your tokens, and in return you receive a different asset (a lending token or receipt). This triggers CGT on any gain.

Earning Interest

Interest or rewards from DeFi lending are taxed as income. The amount is the GBP value of the crypto received at the time it’s credited to your account.

Providing Liquidity

When you add liquidity to a DeFi pool:

• You typically swap one token for a liquidity pool token
• This swap is a disposal — CGT applies on any gain
• Fees earned from providing liquidity are income

Wrapping Tokens

Wrapping tokens (e.g., ETH to WETH) may not be a disposal if you retain the economic interest. HMRC hasn’t given definitive guidance — record the transaction and seek advice if large amounts are involved.

NFT Taxation

Non-Fungible Tokens (NFTs) follow similar rules to crypto but with some nuances.

Selling NFTs

If you buy an NFT and sell it later at a profit, Capital Gains Tax applies. The gain is the sale price minus what you paid (including gas fees).

Creating and Selling NFTs

If you create and sell NFTs as a business (regular sales, commercial intent), the income is taxed as trading income under Income Tax rules. If it’s occasional (you made one NFT and sold it), it’s likely capital in nature.

Gifting NFTs

Gifting an NFT to someone other than a spouse triggers a disposal for CGT purposes. You’re treated as selling at market value.

Worked Example

Scenario: Alex buys 1 ETH for £2,000 in January 2025. Sells it for £3,000 in September 2025. Alex is a basic-rate taxpayer.

Calculation:

1. Cost basis: £2,000
2. Proceeds: £3,000
3. Gain: £3,000 – £2,000 = £1,000
4. CGT allowance: £3,000 (2024/25 tax year)
5. Taxable gain: £1,000 – £3,000 = £0 (within allowance)
6. Tax owed: £0

Alex’s entire £1,000 gain falls within the £3,000 annual allowance, so no tax is due.

If Alex were a higher-rate taxpayer: Still £0 — the CGT allowance applies regardless of income band. The rate only matters once gains exceed the allowance.

If Alex had gains of £10,000:

• Taxable amount: £10,000 – £3,000 = £7,000
• Basic-rate taxpayer: 18% × £7,000 = £1,260
• Higher-rate taxpayer: 24% × £7,000 = £1,680

Tax Planning Tips

Maximise Your Allowance

Each person has their own £3,000 CGT allowance. Couples can each use theirs — selling assets jointly can double the allowance.

Time Your Sales

If you have gains from other assets (shares, property), consider which year to realise crypto gains in. Spreading disposals across tax years helps use your annual allowance.

Use Losses

If crypto has fallen in value, selling crystallises the loss. This loss can offset gains in the same year or carried forward to future years.

Consider an ISA

Some platforms offer crypto within a Stocks and Shares ISA (limited to certain crypto assets like Bitcoin and Ethereum ETPs). Gains within an ISA are tax-free.

Keep Records from Day One

Start recording every transaction the moment you make it. Trying to reconstruct years of history is painful and error-prone.

Tools and Resources

Crypto Tax Software

• Koinly: Automatically imports from major exchanges and wallets, calculates gains using HMRC rules
• CoinTracker: Similar features, supports many exchanges and DeFi protocols
• Accointing: Good for DeFi and staking transactions
• Blockpit: Supports UK tax reporting

These tools save hours of manual calculation and reduce errors.

HMRC Resources

• HMRC Cryptoassets Manual (CG13): Official guidance on how crypto is taxed
• GOV.UK: Check tax rates and allowances for the current year
• Self Assessment Online: File your return at gov.uk/self-assessment

Professional Advice

If your crypto holdings are significant, or if you have complex DeFi positions, consider speaking to a tax adviser. Services like TaxScouts offer affordable tax return preparation with crypto expertise.

Common Mistakes to Avoid

1. Ignoring small gains: HMRC can query you even for small amounts — keep records of everything
2. Using FIFO or LIFO: HMRC uses pool accounting, not other methods
3. Not reporting trades between crypto: Swapping Bitcoin for Ethereum is a disposal — CGT applies
4. Forgetting staking income: Staking rewards are income, not capital gains
5. Assuming privacy: HMRC has data-sharing agreements with major exchanges and can request your trading history
6. Not declaring on Self Assessment: Penalties for non-declaration start at £100 and increase with the amount owed

Getting Started

If you hold crypto and haven’t been reporting:

1. Gather your transaction history from all exchanges and wallets
2. Use crypto tax software to calculate your gains and losses
3. Register for Self Assessment if you’re not already registered (deadline: 5 October after the end of the tax year)
4. File your return by 31 January following the end of the tax year
5. Pay any tax owed by the same deadline

The sooner you get your records in order, the easier it is. HMRC are increasingly focusing on crypto compliance, and making voluntary disclosures is always better than being contacted first.