How the UK taxes cryptocurrency and NFTs

Whether any profit or gain is chargeable or any loss is allowable will be considered by HMRC on a case-by-case basis and will depend on the activities and the parties involved and the investor’s intentions.

HMRC’s guidance on the tax treatment of individuals on transactions involving cryptocurrencies was originally set out in their policy paper entitled, “Cryptoassets: tax for individuals” and is now in the Cryptoassets Manual. The guidance recognises two possible types of transactions in cryptocurrencies:

• trading in cryptocurrencies; and
• investing in cryptocurrencies.

Where an individual regularly buys and sells Bitcoin and other similar cryptocurrencies with a view to profit, this may amount to a trading activity if it has the necessary frequency, organisation and sophistication to amount to a financial trade. Though in the case of individuals, HMRC would regard trading in cryptocurrencies as an “exceptional” case.
Where an individual is trading, they will be subject to income tax on trading profits (or may accrue trading losses). Where losses arise, HMRC is likely to carefully consider whether the individual is in fact trading before allowing loss relief.

HMRC has stated that they do not consider the buying and selling of cryptocurrencies to amount to “gambling”.

Where an individual buys and sells Bitcoin or other similar cryptocurrencies in circumstances where it does not amount to a trade, they will be investing in Bitcoin or other similar cryptocurrencies. Any gains or losses incurred are chargeable to or allowable for capital gains tax. HMRC would expect buying and selling cryptocurrencies to normally amount to an investment activity. HMRC does not consider cryptoassets to be currency or money for tax purposes.

There are no specific rules requiring yearly mark to market valuation of cryptocurrencies. However, where cryptoassets are held as part of a financial trade, these would normally be taxed on a mark to market basis under normal UK tax rules.

Whether any profit or gain is chargeable or any loss is allowable will be considered by HMRC on a case-by-case basis and will depend on the activities and the parties involved and the company’s intentions.

Similar principles will apply for corporate investors as for individual investors to determine if the company is investing or trading in the cryptocurrency (see the previous question on how individuals are taxed).

HMRC’s guidance on the tax treatment of businesses on transactions involving cryptocurrencies was originally set out in their policy paper entitled, “Cryptoassets: tax for businesses” and is now contained in the Cryptoasset Manual.

The profits and losses of a company entering into transactions involving Bitcoin and other similar cryptocurrencies in the course of a trade would be reflected in the company’s accounts and taxable under normal corporation tax rules. If a company holds cryptoassets as an investment, they are liable to pay corporation tax on any gains they realise when they dispose of it.

HMRC takes the view that cryptocurrencies will not represent loan relationships nor money. As such, profits from disposals of cryptocurrencies which do not involve trading will normally be taxed as a chargeable gain subject to corporation tax. HMRC does recognise, however, that in certain cases the rules for taxing intangible fixed assets as income may apply (though cryptocurrencies which are simply held by a company, rather than created or acquired for use on a continuing basis, will not fall within this definition).

Yes, the use of cryptocurrencies as payment for goods or services involves their disposal so as to give rise to a taxable event.

Cryptocurrency may be awarded to “miners” in return for verifying additions to the ledger. Whether such activity amounts to a trade will depend on the particular facts using the same factors described above. Simply using a home computer to mine tokens would not normally amount to a trade. Where it does not amount to a trade, then any cryptocurrency awarded for successful mining would generally be taxable as miscellaneous income. Where it does amount to a trade, then any cryptocurrency awarded for successful mining would generally be taxable as trading profits.

Where someone receives an allocation of cryptocurrency as part of, for example, an advertising campaign, no income tax will be due if it is received without the individual doing anything in return and where it is not received as part of a business. Where the individual provides some service for the airdrop, then it will normally be taxable as miscellaneous income.

Where a business receives an allocation of cryptocurrency as part of an advertising campaign (for example) without providing any service for the receipt, then it will be treated as a separate business asset but (most likely) without any allowable cost for chargeable gains purposes.

HMRC recently included guidance in its Cryptoasset Manual setting out HMRC’s view on the taxation of cryptoassets used in decentralised finance (DeFi) transactions. The new guidance covers a number of important tax questions concerned with DeFi transactions, including HMRC’s view on the nature of returns from these activities and when taxable events occur where cryptoassets are lent or staked. In particular, HMRC’s guidance indicates that the lending or staking of cryptoassets to a DeFi platform in return for other tokens received from the DeFi platform will generally give rise to a disposal for tax purposes where the lender/transferor has transferred beneficial interest in their tokens. The same analysis would apply to a borrower who provides tokens as collateral for a loan. This analysis is fact specific and will depend on particular terms of any arrangement as well as factors including the nature of smart contracts deployed and the underlying technology of the tokens lent/staked. However, this analysis potentially leads to a tax charge in circumstances where the lender/transferor does not receive any return at the time of the disposal.

HMRC does not consider the return earned by the lender/staker to be interest for tax purposes. Consequently, any provisions which apply to interest specifically will not apply to the return. How the return is taxed will depend on whether the receipt has the nature of capital or revenue.

In 2023, HMRC published a consultation document proposing to introduce legislation to disregard transactions for tax purposes that arise through the lending or staking of cryptoassets. A response is still awaited to that consultation.

See the previous question.

HMRC has stated that where there is a “hard fork”, creating a new cryptocurrency, that will not amount to a disposal of itself and any allowable costs for the original cryptocurrency will need to be allocated between the original and new cryptocurrencies.

Where cryptoassets are received as earnings for employment they will count as “money’s worth” and will be subject to income tax and NICs on their value.

An employer’s obligation in relation to cryptoassets provided as earnings will depend on whether they amount to “readily convertible assets” (RCAs). This in turn depends on whether there are “trading arrangements” in existence. Where there are trading arrangements (such as with Bitcoin), then employers must deduct and account to HMRC for PAYE and NICs, based on a best estimate of the cryptoassets’ value.

Where cryptoassets are not RCAs, no PAYE obligation arises on the employer. Instead, the individual employee must report and pay income tax under self-assessment, and the employer must treat the award as a payment in kind and pay Class 1A NICs to HMRC.

If tokens are given away to another person (who is not a spouse or civil partner), the individual making the gift is treated as having received an amount equal to the pound sterling value of what has been given away for CGT purposes, even if they did not actually receive anything. However, if an individual donates tokens to charity, they will not have to pay CGT on them.

There is no express deferral regime under UK law for an exchange of cryptocurrencies against other cryptocurrencies or against other cryptoassets.

No, there are no transfer taxes applicable to the acquisition of cryptocurrencies. HMRC’s view is that existing exchange tokens would not be likely to meet the definition of “stock or marketable securities” or “chargeable securities” for these purposes. For other types of cryptoasset, this will be considered on a case-by-case basis, dependent on the characteristics and nature of the cryptoassets, rather than any labels attached to them.

There is no specific obligation to declare the holding of cryptocurrencies to HMRC.

The tax reporting obligations for transactions in cryptocurrencies simply follow the normal tax reporting obligations applicable to other taxable transactions. . However, HMRC has recently carried out a campaign to make individuals aware of the need to report transactions in cryptoassets and has launched a Cryptoasset Disclosure Service where taxpayers may need to disclose unpaid tax from previous years. In addition, it has been announced that a change will be made to tax returns to require amounts in respect of cryptoassets to be separately identified when the capital gains tax pages to the return are completed from the 2024/25 tax year.

In addition, the UK is a signatory to the OECD cryptoasset reporting framework (CARF). CARF provides for the automatic exchange of information on cryptoassets, similar to the way in which the Common Reporting Standard (CRS) provides for exchange of information on financial accounts. The UK is committed to implementing CARF and it is expected that legislation will be introduced during 2025. CARF will require cryptoasset service providers to collect and report information on cryptoasset transactions undertaken from 2026. HMRC will then receive and share relevant data with participating jurisdictions for tax purposes from 2027. It is expected that the rules will cover both cryptocurrency and other cryptoassets, including NFTs.

HMRC’s guidance on the business tax treatment of transactions involving cryptoassets, such as Bitcoin, confirms that exchanges of cryptocurrencies for actual legal tender are treated as exempt from VAT. This follows the CJEU decision in Hedqvist (Case C-264/14) that Bitcoin and other cryptocurrencies should be treated in a similar way to other currencies for VAT purposes. Therefore, where a person pays consideration for the acquisition of Bitcoin, there is a supply that is exempt from VAT under VATA 1994 Schedule 9 Group 5. This exempts transactions, (including negotiations), concerning currency, bank notes and coins used as legal tender.

The guidance confirms the VAT treatment of a number of other transactions involving Bitcoin and other cryptocurrencies:

• cryptoassets received from “mining activities” will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity because there is an insufficient link between any services provided and any consideration received and there is no customer for the mining service;

• when cryptoassets are exchanged for goods and services, no VAT will be due on the supply of the cryptoasset (though VAT will be due in the normal way on the goods or services provided); and

• charges (in whatever form) made over and above the value of the cryptoasset for arranging or carrying out any transactions in cryptoassets will also be exempt from VAT.

HMRC guidance does not currently cover the tax treatment of tokens or cryptoassets issued pursuant to an ICO and the tax treatment is currently unclear. The actual tax treatment may depend on the exact terms of the ICO.

Where the ICO is a capital raising exercise, it may be that the cryptoasset is treated as an asset in respect of which the company has no obvious base cost. If so, the company may be treated as disposing of an existing asset which it has created and subjected to corporation tax on the full proceeds. Alternatively, the company may be treated in an analogous way as an issuer of shares—where the share is treated as created rather than disposed of by virtue of the issuance—so that no tax charge arises.

If the company makes regular issues of cryptoassets, it may be arguable that it forms part of a trading activity so that the ICO proceeds are taxed as income in accordance with the accounts.

There is currently no guidance on the VAT treatment of an ICO. It seems likely, however, that the VAT position for an issuer in an ICO will depend on the nature of the tokens being issued:

• if the tokens are comparable to shares or securities, their issue should fall outside the scope of VAT (though note that HMRC take the view that existing exchange tokens would not be likely to meet the definition of “stock or marketable securities” or “chargeable securities” for stamp tax purposes);

• if the tokens are a new cryptocurrency, their issue should be exempt from VAT; and

• if the tokens do not equate to shares, securities or currency, their issue will give rise to a supply for consideration and is likely to be subject to VAT, unless the only right the tokens confer is a right to payment, in which case the supply should be exempt. For utility tokens (which resemble vouchers in that they can be redeemed for goods or services), it is possible that the special VAT rules for vouchers could apply. The VAT treatment of vouchers is complex and depends on whether a voucher is a single or multipurpose one.

As tokens are intangible, their issue would be a supply of services and is likely to be a supply of “electronically supplied services”. This means the supply is treated as being made in the country where the recipient belongs.

No, there are no transfer taxes applicable to the issue or acquisition of cryptocurrencies. HMRC’s view is that existing exchange tokens would not be likely to meet the definition of “stock or marketable securities” or “chargeable securities” for these purposes. Other cryptoassets will be considered on a case-by-case basis, dependent on the characteristics and nature of the cryptoassets, rather than any labels attached to them.

There are no specific rules regarding the creation of NFTs but generally their creation is unlikely to give rise to a taxable event. In respect of sale, generally NFTs are regarded as another form of cryptoasset for tax purposes and the tax treatment follows those of other cryptoassets.
More generally, the exact tax treatment of NFTs would depend on the specific characteristics, utility and nature of the NFT, rather than the labels attached to it, determined on a case-by-case basis. Provided that the NFT provides no ownership rights in underlying assets, then its tax treatment is likely to follow those of other comparable cryptoassets. Different consideration may arise should an NFT have different characteristics, such as ownership rights in underlying assets.

There are no specific rules regarding the creation of NFTs but their creation is unlikely to give rise to a taxable event. In respect of sale, NFTs are regarded as another form of cryptoasset for tax purposes and the tax treatment follows those of other cryptoassets.
More generally, the exact tax treatment of NFTs would depend on the specific characteristics, utility and nature of the NFT, rather than the labels attached to it, determined on a case-by-case basis. Provided that the NFT provides no ownership rights in underlying assets, then its tax treatment is likely to follow those of other comparable cryptoassets. Different consideration may arise should an NFT have different characteristics, such as ownership rights in underlying assets.

No, NFTs are regarded as another form of cryptoasset for tax purposes and the tax treatment follows those of other cryptoassets.
More generally, the exact tax treatment of NFTs would depend on the specific characteristics, utility and nature of the NFT, rather than the labels attached to it, determined on a case-by-case basis. Provided that the NFT provides no ownership rights in underlying assets, then its tax treatment is likely to follow those of other comparable cryptoassets. Different consideration may arise should an NFT have different characteristics, such as ownership rights in underlying assets.

No, there is no express tax deferral regime available for NFTs

If tokens are given away to another person (who is not a spouse or civil partner), the individual making the gift is treated as having received an amount equal to the pound sterling value of what has been given away for CGT purposes, even if they did not actually receive anything. However, if an individual donates tokens to charity, they will not have to pay CGT on them.

There are no specific transfer taxes applicable to cryptoassets. Whether any transfer taxes might apply to a transfer of NFTs would be considered on a case-by-case basis, dependent on the characteristics and nature of the assets, rather than any labels attached to them.

There is no specific obligation to declare the holding of cryptocurrencies to HMRC.

The tax reporting obligations for transactions in cryptocurrencies simply follow the normal tax reporting obligations applicable to other taxable transactions. For further information, see Question 16 above. In particular, it is expected that the UK rules implementing CARF will also cover most NFTs.

There is no specific guidance on the VAT treatment of NFTs. However, as NFTs do not constitute tangible assets, they are treated as supplies of services for VAT purposes. It is likely that they will be treated as electronically supplied services so that the place of supply for VAT purposes is where the customer is located.

For the VAT treatment of supplies of cryptoassets more generally, see question 16.