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How to Deal with Cryptocurrency and Taxes Correctly?

What is Cryptocurrency?

This is any form of currency that exists digitally and uses cryptography to secure transactions. In recent times, cryptocurrency has become very popular and therefore, taxing it has become very necessary for governments.

Some examples of cryptocurrencies are Bitcoin, Ripple, Ethereum etc

How does HMRC View It?

HMRC does not class cryptocurrency as money. According to them, there are four types of cryptocurrency:

  1. Exchange tokens - Used to make payment

  2. Utility tokens - Provides the holder with the right to access goods and services

  3. Security Tokens - Gives the holder the right to profit and loss in business ventures

  4. Stable coins - These are coins that are pegged to another asset with a stable value such as fiat currency.

Cryptocurrency & Taxes

The income you receive from your cryptocurrency will be tax as income if it’s held to obtain profit (i.e., from buying and selling). Therefore, this will be taxed as a trading profit and income tax rules will apply.

However, if you hold the cryptocurrency as an investment, you will be taxed under capital gains tax rules. This will mean when you dispose it off, there will be capital gains tax implications.

Disposal of a cryptocurrency includes the following:

  • Selling Crypto asset for money

  • Exchanging crypto asset for another type of crypto asset.

  • Using crypto asset to pay for goods and services

  • Giving crypto asset to another person.

Your annual exemption amount for capital gains purposes will be applicable and therefore help reduce the gain and the tax you pay.

Cryptocurrency is a very complex subject, if you are unsure if you are treating this income in the correct way, we can help you navigate this area in the most appropriate way, use the link below to arrange a FREE initial Conversation.

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