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Shining a light on cryptocurrency

Michelle Robinson considers cryptocurrency and how it should be taxed. She explores cryptomining and passive investors, as well as giving some practical examples and explaining why HMRC does not consider cryptocurrency to be currency or money.

CryptocurrencyOver recent years, cryptocurrencies have gained in prominence, with Bitcoin undoubtedly the most well-known. So what is cryptocurrency – and how should it be taxed?

Cryptocurrencies are a type of cryptoasset that make use of a type of distributed ledger technology called blockchain. Cryptocurrency can be used as a means of exchange or held as an investment. People may purchase existing cryptocurrency or obtain new currency via ‘cryptomining’, which essentially means confirming the authenticity of cryptocurrency transactions and updating the blockchain.

As a starting point in understanding the UK income tax and capital gains tax (CGT) analysis, it is not essential to understand the technology that underpins cryptocurrencies; it is enough to understand that they are within the scope of taxation.

Approach to taxation

There are no specific UK tax rules for cryptocurrency, so existing provisions are applied to determine the tax position. This is relatively straightforward in some cases but can be challenging in others.

Source and situs are especially thorny issues, as cryptocurrency is not associated with any particular jurisdiction. For example, the entire Bitcoin blockchain – the computer code which comprises Bitcoin – is stored on servers across the world. It could be said to be both everywhere and nowhere. This leads to obvious uncertainty for persons whose tax position depends on source of income and situs of assets, such as remittance basis users.

HMRC recently published guidance on cryptoassets, which does not comment on this issue (see the general guidance and the 19 December 2018 policy paper, Cryptoassets for individuals. New legislation could provide clarity but is unlikely to arrive imminently. In the meantime, careful consideration must be given to positions taken on tax returns and appropriate disclosures made.

The remainder of this article looks at the UK income tax and CGT position of individuals who hold cryptocurrency directly. It does not comment on the potential application of the remittance basis.

Money, money, money

Despite the name, HMRC does not currently consider cryptocurrency to be a currency or money.

This means that, for now at least, neither the exemption for foreign currency used for personal expenditure (s269, Taxation of Chargeable Gains Act 1992 (TCGA 1992)) nor the foreign currency bank account exemption (s252, TCGA 1992) are available. It is possible this may change in the future, as the technology evolves and becomes more widespread.

Taking a gamble

The 2014 HMRC guidance (Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies) made a general statement that, depending on the facts, “a transaction may be so highly speculative that it is not taxable or any losses relievable”, and then compared the position to gambling, whereby gains are not taxable and losses are not allowable. Cryptocurrency has become more mainstream since then and the new HMRC guidance reverses this position, stating that “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”.

In other words, HMRC has ruled out the two main avenues of thought that would result in cryptocurrency being exempt. Whether this will continue to be the preferred policy over time remains to be seen.

Income or capital?

Working on the basis that cryptocurrency returns are taxable, the next step is to determine how profits and losses are taxable or relievable. There are three options:

  1. as trading income; 
  2. as miscellaneous income; or
  3. as capital gains. 

Each individual’s facts and circumstances will need to be considered, but HMRC’s broad expectation is that miners – those who are involved in verifying new cryptocurrency – will most likely be within the scope of miscellaneous income, while those who purchase existing cryptocurrency will normally be within the scope of CGT.

HMRC considers that most individuals will fall short of meeting the badges of trade, so returns are only expected to be charged to tax as trading income in exceptional circumstances.

While miners may initially be within the scope of income tax, if coins are retained as an investment it is possible that future changes in value will be within the scope of CGT.

There are other means by which cryptocurrency can be acquired, such as airdrops and forks, which for reasons of brevity are not covered in this article.


Net income from mining activities is chargeable as miscellaneous income under s688, Income Tax (Trading and Other Income) Act 2005, (ITTOIA 2005), assuming that the facts do not indicate that this is one of the rare occasions in which the miner is trading.

Gross income includes any returns the miner receives, such as fees for verifying new transactions added to the blockchain. Allowable expenses may relate, for example, to electricity costs. See example 1 below.

Example 1: mining

Mr A is a Bitcoin miner. He mines by leaving his personal laptop running overnight, where it verifies transactions added to the blockchain. In return for his efforts, Mr A received cryptocurrency worth £2,000 in the tax year. His electricity costs increased significantly; he considers that £200 of the additional expense relates to his mining activities, giving a net return of £1,800. Mr A had a profit motive, but his minimal activity means that the actions he took fall short of meeting the badges of trade. His £1,800 profit is therefore charged to tax as miscellaneous income.

Mr A retains the Bitcoin he received, in the hope it will increase in value in the future. CGT will apply to any future increase in value of the Bitcoin. Section 37, TCGA 1992 will be relevant on a future disposal of the cryptocurrency, meaning that any amounts which have been subject to income tax should not be taxed again. In effect, any uplift in value above £2,000 will be chargeable, and any decrease may be an allowable capital loss.

Passive investors

Existing cryptocurrency may be purchased in a number of ways, though it is common for this to be done through an online platform called an exchange. In such cases, it is likely that returns will not be in the nature of income and so CGT is in point.

Cryptocurrency is a chargeable asset that falls within the rules that are best known for applying to shares, ie, the same day (s105), 30-day (s106A) and pooling rules (s104) in TCGA 1992. The reason for this is that the aforementioned sections apply to securities, which, for this purpose, include any fungible assets.

A chargeable disposal may occur whenever cryptocurrency is disposed of, whether or not cash changes hands. See example 2 below.

Example 2: Cryptocurrency exchanges

Ms B owns 1,000 Litecoin, which she originally bought for £1,500 on 1 January 2015. She holds these in a wallet operated by an exchange, akin to holding shares in a share portfolio. On 1 January 2019 she exchanges all of her Litecoin for coins in Ripple. She has made a chargeable disposal of Litecoin. The chargeable gain or loss must be calculated.

Let us assume that each Litecoin is worth £25. Her disposal proceeds are £25,000. She originally paid £1,500, and so her chargeable gain is £23,500.

In some cases, the value of cryptocurrencies may be expressed only in foreign currencies. Where applicable, the value of the cryptocurrency must be calculated in the relevant foreign currency and the foreign currency value converted into sterling. For example, had Ms B only known the value of her Litecoin expressed in US dollars, she would have needed to convert the dollar amounts on 1 January 2015 and 1 January 2019 using the exchange rates on those dates.

Finally, there may be multiple transactions, as illustrated in example 3 below.

Example 3: Multiple transactions 

Let us assume that Ms B from example 2 purchased 400 Litecoins on 15 January 2019. This is an acquisition within 30 days of a disposal, so 400 of the coins disposed of are regarded as being those purchased on 15 January 2019, with the remainder being sold from the pool. The new Litecoin cost £30 each.

400 Litecoin within 30-day rule:   £ 
Disposal proceeds: 400 x £25
Less: cost: 400 x £30
Allowable loss:
600 Litecoin from Litecoin pool:
Disposal proceeds: 600 x £25
Less: cost: (600/1,000) x £1,500
Chargeable gain:

The net chargeable gain realised in 2018/19 is £12,100 (£14,100 - £2,000).

The pool containing the 400 remaining 2015 Litecoin will be available to match to future Litecoin disposals.


Cryptocurrency is a relatively new area, which is evolving quickly. At a high level, existing tax law can be applied to determine the income and CGT position of individuals within the scope of taxation. There are some areas of uncertainty where further clarity is needed, notably source and situs, which are not well-catered for by existing law.

A final thought is that evidence of acquisition costs and selling prices may be limited or available only for a short time, and so it is essential for records to be maintained on an ongoing basis in order to do tax returns.

About the author
Michelle Robinson is an associate director at Deloitte LLP and a member of the Tax Faculty Private Client Committee