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There is an enormous amount of interest in cryptocurrency. Increasingly, cryptocurrency is being seen as a hedge against inflation. It is sometimes referred to as “digital gold”. The amount invested in cryptocurrency has quadrupled in 2021, with the total amount invested soaring to over 3 trillion US dollars [1].

This increased interest raised many interesting tax issues for professional and amateur investors investing in cryptocurrency and cryptocurrency entrepreneurs creating new crypto businesses. This article outlines the significant tax issues a tax professional may encounter in relation to cryptocurrency.

Taxation of individual investors

Essentially, the taxation treatment of cryptocurrency gains and loss for investors fall into one of three categories:

  1. Gambling gains and losses;
  2. Trading gains and losses;
  3. Capital gains and losses.

The taxation treatment of each of these categories is explored below

Gambling gains and losses

Every individual who makes a gain would like to say that it was a gambling gain because gambling gains are arguably tax-free.

Realistically, it is highly unlikely that an individual would ever make a gambling gain.

From a factual point of view, a taxpayer would have to trade almost blindly to have any hope of claiming that a gain was a gambling gain. Cryptocurrency markets are now much more sophisticated than they were five years ago. Many websites publish crypto trading strategies, and there are even crypto broker research reports. Most investors have some sort of strategy, and realistically they will struggle to maintain that a gain is a gambling gain.

From a legal point of view, there is little authority to support an argument that a gambling gain should be tax-free.

Finally, even if a taxpayer succeeded in surmounting these hurdles, they would almost certainly be caught by the capital gains tax legislation as the “gambling exemption” in section 51(1) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) doesn’t apply to cryptocurrency gains and losses.

Essentially, an investor won’t generally be able to make an argument that their cryptocurrency gain is a tax-free gambling gain.

However, until December 2018, HMRC had published guidance that a cryptocurrency gain or loss was a gambling gain or loss. A taxpayer who satisfies the criteria in this guidance, keeping in mind that it is difficult to satisfy the “gambling” criteria, should be able to rely on it and claim this treatment for cryptocurrency gains in respect of tax returns filed prior to December 2018.

Trading gains and losses

Many investors who make a cryptocurrency gain or loss would like to say that it is a trading loss because trading losses are typically easier to utilise.

There are essentially four criteria that must be satisfied for a cryptocurrency gain or loss to be a trading gain or loss:

  1. The investor must undertake the activity on a full-time basis;
  2. The investor should have a strategy, however unsophisticated, that they execute against;
  3. The investor should have a business plan, ideally a written business plan; and
  4. The taxpayer should undertake some basic bookkeeping.

Realistically, many individual investors will probably fail to satisfy all four of these criteria. However, it is possible that an individual investor who is undertaking cryptocurrency trading on a full-time basis with some level of organisation may potentially be able to satisfy these criteria.

However, professional investors such as hedge funds and professional trading firms should always make trading gains and losses.

Capital gains and losses

The final taxation treatment is that cryptocurrency gains and losses could be capital gains and losses.

For many individual investors, this will be the correct taxation treatment.

It should be noted that the capital gains tax pooling rules need to be observed. It can be complicated to calculate cryptocurrency gains and losses correctly under these rules.

Non-domiciled individuals – taxation treatment

Arguably, the taxation of non-domiciled individuals is the most contentious issue in relation to the taxation of individuals and cryptocurrency.

For inheritance tax purposes, a non-domiciled individual is only subject to inheritance tax on their UK “situated” assets.

For capital gains tax purposes, a non-domiciled individual can use the remittance basis for their capital gains and losses in respect of assets that are “situated” outside the UK.

Where is a de-centralised cryptocurrency like Bitcoin “situated” for the purposes of inheritance tax?

HMRC’s cryptocurrency manual at CRYPTO22600 considers that a de-centralised cryptocurrency like Bitcoin will be “situated” in the jurisdiction where the individual holding it is resident for tax purposes [2].

There is no clear, authoritative guidance from case law on this issue. However, on the basis that cryptocurrency is an intangible asset, some argue that it is akin to goodwill. Goodwill is “situated” in the jurisdiction of the business to which it attaches [3].  Similarly, cryptocurrency can be argued to attach to an individual, and therefore be “situated” in the jurisdiction that the individual is tax resident.

There is also a decent argument that cryptocurrency is situated where an individual stores their private key, where they are domiciled or where they execute their transactions or some combination of these matters. This issue is not clear cut.

However, a non-domiciled taxpayer who claims that their de-centralised cryptocurrency is a non-UK asset is likely to be headed towards a dispute with HMRC.

Where is a de-centralised cryptocurrency like Bitcoin “situated” for the purposes of capital gains tax?

For capital gains tax purposes, the matter is more complicated. Section 275 and 275A of the TCGA 1992 provides a very long and prescriptive set of rules for determining the “situs / situation” of assets for the purposes of the capital gains tax legislation.

In their Cryptocurrency Manual at CRYPTO22600, HMRC considers that where the crypto asset references no underlying asset, cryptocurrency is situated where the individual who owns it is resident. Effectively, the cryptocurrency “situs / situation” is the same for capital gains tax purposes as for inheritance tax purposes.

However, there is a decent argument that sections 275 and 275A of the TCGA 1992 constitute a “code” for the purposes of the capital gains tax legislation. On this basis, cryptocurrency would be “situated” where it was first created. While it may involve a lot of effort for an individual to demonstrate where their cryptocurrency was first “mined”, it is possible to make a decent argument that cryptocurrency is “situated” somewhere outside the UK for capital gains tax purposes for a UK resident individual.

Again, a non-domiciled UK resident taxpayer who maintains that their de-centralised cryptocurrency is a non-UK asset is likely to be headed towards a dispute with HMRC.

Finally, it should be noted that where a cryptocurrency token grants rights in respect of an underlying asset such as an equity interest or a debt interest, it will be the “situs / situation” of the underlying equity interest or debt interest that determines the “situation” of that cryptocurrency.

Tax issues for entrepreneurs – structuring corporate crypto businesses

The enormous interest in cryptocurrency has spawned many entrepreneurs who have started or are looking to start successful crypto businesses.

It helps to resolve how the company group should be structured as early as possible to maximise tax benefits for the business.

Ideally, the business will be headquartered in a low tax jurisdiction. The headquarters / corporate group will need to have substance around it in the sense that there will need to be staff and real economic activity taking place in the low tax jurisdiction. This will generally mean ensuring both executive management and the senior software engineering team are resident in the low tax jurisdiction. In this way, more profits of the overall group can be defensibly pulled into the low tax jurisdiction. Great care needs to be taken implementing the structure to ensure that it is defensible, particularly from a transfer pricing point of view

The above structuring can be particularly difficult for crypto entrepreneurs based in the UK who start developing crypto intellectual property in the UK. These entrepreneurs are likely to face high exit tax charges to move their intellectual property to an offshore jurisdiction. The entrepreneurs themselves may need to relocate in order to make the structure defensible and in order to minimise tax on any cryptocurrency tokens they receive for being founders of the business.

The sooner a crypto entrepreneur seeks tax advice in relation to these issues, the better the tax outcome they are likely to achieve.


Cryptocurrency is a novel innovation that is throwing up many interesting tax issues that can be difficult for tax professionals to grapple with.

An extensive, detailed, and highly authoritative analysis of the above issues and many other insights appear in the publication Cryptocurrency and Blockchain, Taxation Insights published through Bloomsbury Professional, free to member firms, in February 2020.


[1] https://www.bloomberg.com/news/articles/2021-11-08/crypto-world-hits-3-trillion-market-cap-as-ether-bitcoin-gain

[2] https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto22600

[3] See IRC v Muller [1901] AC 217