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The United Kingdom (UK) has not yet introduced legislation to regulate cryptoassets. Instead, it has adopted a wait-and-see approach. Although the UK has not developed a specific set of taxation laws or regulations that apply to cryptoassets, it has issued guidance to aid in the application of existing laws. The taxation of cryptoassets is dependent upon how they are used.

I. Introduction

The United Kingdom (UK) has yet to introduce legislation to regulate the use of cryptoassets. Instead, it has adopted a cautious, wait-and-see approach. The Bank of England stated it does not consider cryptocurrencies to be money as they are “too volatile to be a good store of value, they are not widely-accepted as means of exchange, and they are not used as a unit of account.”[1] It has further stated that it believes the current generation of cryptoassets show little evidence of delivering any kind of benefits to the financial services and other sectors, but given the rapidly developing market, this may change in the future.[2]  

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II. Tax Treatment of Block Rewards

There are no taxation laws that apply specifically to cryptoassets, rather, existing laws have been applied to them.[3] HM Revenue & Customs (HMRC) issued its first policy paper detailing the tax treatment of cryptoassets acquired, held, and sold by individuals in late 2018. The policy paper focused on ensuring that the tax treatment of profits and losses from transactions involving these types of assets is clear.[4] HMRC noted that the tax treatment of these tokens is dependent upon how they are used, rather than on the definition of the token.[5] A task force developed a framework to take into account three potentially different uses for cryptoassets:

  1. As a means of exchange, functioning as a decentralised tool to enable the buying and selling of goods and services, or to facilitate regulated payment services.
  2. For investment, with firms and consumers gaining direct exposure by holding and trading cryptoassets, or indirect exposure by holding and trading financial instruments that reference cryptoassets.
  3. To support capital raising and/or the creation of decentralised networks through Initial Coin Offerings (ICOs).[6]

HMRC does not consider cryptoassets to be currency or money. Instead, it defines cryptoassets as

cryptographically secured digital representations of value or contractual rights that can be:  

  • transferred
  • stored
  • traded electronically[.]

While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.[7]

A. Taxation of Mining

Mining cryptoassets is not subject to specific taxation legislation or regulations, and the taxation of mining depends upon the specific circumstances of each case. To help determine whether mining is a taxable trade, and is thus subject to deductions from the trading profits,[8] HMRC has provided guidance and stated a number of factors must be considered, including the degree of activity, risk, organization and commerciality involved in the process.[9] In guidance for businesses, HMRC has stated that using a home computer that has spare capacity to mine tokens does not typically amount to a trade, but that the purchase of “a bank of dedicated computers to mine tokens for an expected net profit (taking account the cost of equipment and electricity) would probably constitute trading activity.”[10]

If mining is determined to be a taxable trade, any costs incurred in the mining activity may be deductible against any trading profits.[11] Any cryptoassets mined would:

initially form part of trading stock. If these cryptoassets are transferred out of trading stock, the business will be treated as if they bought them at the value used in trading accounts. Businesses should use this value as an allowable cost in calculations when they dispose of the cryptoassets.[12]

Thus, the transfer of a cryptoasset out of trading stock counts as a sale at market value for trading purposes, and a profit or loss must be calculated at this time. If the token is subsequently disposed of, capital gains tax or corporate rate tax is calculated according to the market value at the date the cryptoasset was taken out of trading stock.[13]

HMRC notes that, if the mining activity does not amount to a taxable trade, the value at the time of receipt of any cryptoassets awarded as a result of mining will be taxed as miscellaneous income,[14] and the individual will have to complete a self-assessment tax return unless the cryptoassets are worth less than £1,000 (approximately US$1,400) or the individual has received less than £2,500 (approximately US$3,300) from other untaxed income.[15] Any expenses involved in mining may serve to reduce the amount of chargeable tax, although HMRC has stated that the typical costs of mining activities, such as computers and electricity, are not allowable costs for the purposes of corporate rate tax or capital gains tax as they cannot satisfy the requirements of section 38(1)(a) of the Taxation of Chargeable Gains Act 1992, as they are not wholly and exclusively to acquire the exchange of tokens.[16]

In cases where individuals mining cryptoassets decide to keep any they have mined, capital gains tax may later become payable when the asset is disposed of.[17] Disposal of cryptoassets may occur when selling cryptoassets for regular currency, exchanging one form of cryptoassets for another, using cryptoassets to pay for goods or services, or giving cryptoassets away to someone who is not the owner’s spouse or civil partner. In the case of cryptoassets that have been taxed as income, any capital gains tax due will be reduced by the amount of income tax.[18]

HMRC has specified that any costs for mining are not allowable costs for the purposes of capital gains tax and thus may not be allowed as a deduction when determining whether a gain or loss has been made. HMRC has stated this is because such costs are

not wholly and exclusively to acquire the cryptoassets, and so cannot satisfy the requirements of section 38(1)(a) Taxation of Capital Gains Act 1992 (but it is possible to deduct some of these costs against profits for Income Tax or on a disposal of the mining equipment itself).[19]

Any payment, through fees or other rewards, in return for mining are also subject to income tax, either as trading or miscellaneous income, using the same criteria as above.[20] If the individual mining receives cryptoassets as payment, any increase in value from the time the asset was acquired will be taken into account when computing trading profit or as a chargeable gain for capital gains tax upon the disposal of the asset. [21]

HMRC has noted that individuals holding cryptoassets as a personal investment will be liable to pay capital gains tax when the assets are disposed of. Income tax and national insurance contributions will also be due for individuals that receive cryptoassets through mining, as a transaction confirmation, from their employer as a form of noncash payment, or through airdrops.[22]

Section 104 of the Taxation of Chargeable Gains Act 1992 provides that certain assets that can “be dealt in without identifying the particular assets disposed of or acquired” must be pooled together to allow for the easier calculation of taxes. HMRC has stated that it believes cryptoassets meet the requirements of this section, and thus must be pooled.[23]

B. Taxation of Airdrops

The taxation of airdrops of tokens or cryptoassets depends upon the reasons for which the assets were received. Income tax does not apply to airdrops that are received in a personal capacity if they are provided without the recipient doing anything in return for them and are not provided as part of a trade or business that involves cryptoassets or mining. [24]  Airdrops received in return for, or expectation of, a service are subject to income tax as either miscellaneous income or receipts of an existing trade.[25] HMRC has further noted:

The disposal of a cryptoasset received through an airdrop may result in a chargeable gain for Capital Gains Tax, even if it’s not chargeable to Income Tax when it’s received. Where changes in value get brought into account as part of a computation of trade profits Income Tax will take priority over Capital Gains Tax.[26]

Capital gains tax may become chargeable upon the disposal of any cryptoassets received, regardless of whether it was payable upon the receipt of the assets.[27]

C. Taxation of Forging

There do not appear to be any specific references to staking or forging for proof of stake cryptocurrencies in the laws or policy of the UK.

D. Taxation of Blockchain Forks

HMRC has stated that “hard forks” in the blockchain resulting in the creation of new cryptoassets will lead to an individual holding the same number of cryptoassets after a fork as they held on the original blockchain. HMRC notes “[t]he value of the new cryptoassets is derived from the original cryptoassets already held by the individual. This means that section 43 Taxation of Capital Gains Act 1992 will apply”[28] upon the disposal of these assets. No tax is payable upon the receipt of the new cryptoassets.[29]

One of the main difficulties arising when such assets are disposed of is the calculation of any allowable costs. HMRC notes that any new cryptoassets created after the fork must go into their own pool,[30] and that allowable costs for pooling of the original cryptoassets must be split between the pool for both the new and original cryptoassets on a just and reasonable basis.[31] HMRC has not issued any guidance regarding what it considers to be a just and reasonable basis, but it has stated that it may use its power to investigate any split that it does not believe has been made on this basis.[32]

In cases where individuals hold cryptoassets through an exchange, the exchange must make the determination whether or not to recognize any new cryptoassets created by a fork in the blockchain. These newly created cryptoassets may only be disposed of if the exchange recognizes them. HMRC has acknowledged that potential difficulties may arise if the exchange does not recognize the new cryptoasset, as the blockchain will still show the individual as the owner of the new units of cryptoassets. It notes that it “will consider cases of difficulty as they arise.”[33]

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Prepared by Clare Feikert-Ahalt
Senior Foreign Legal Specialist
January 2021


[1] HM Treasury et al., Cryptoassets Taskforce: Final Report (Oct. 2018), ¶ 2.13, https://perma.cc/LE5W-5MZS

[2] Id. at 2.

[3] Blockchain & Cryptocurrency Regulation 2021: United Kingdom, Global Legal Insights, https://perma.cc/MSL3-LVSS

[4] HMRC, Policy Paper: Cryptoassets for Individuals (Dec. 19, 2018), https://perma.cc/KJ8N-T26S.

[5] Id.

[6] HM Treasury et al., supra note 1, ¶ 2.11.

[7] HMRC, Policy Paper: Cryptoassets for Individuals, supra note 4.

[8] HMRC, Policy Paper: Cryptoassets: Tax for Businesses (Dec. 20, 2019), https://perma.cc/L7V9-59ML.

[9] HMRC, Policy Paper: Cryptoassets for Individuals, supra note 4.

[10] HMRC, Policy Paper: Cryptoassets: Tax for Businesses, supra note 8. 

[11] Id.

[12] HMRC, Policy Paper: Cryptoassets for Individuals, supra note 4.

[13] Taxation of Chargeable Gains Act 1992, c. 12 § 161(2), https://perma.cc/9ALZ-STAB. See also HMRC, HMRC Internal Manual: Capital Gains Manual (Oct. 22, 2020) https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg69220, and HMRC, Policy Paper: Cryptoassets: Tax for Businesses, supra note 8.   

[14] Id. 

[15] HMRC, Guidance: Check if You Need to Pay Tax When You Receive Cryptoassets (Dec. 19, 2018), https://perma.cc/NNV9-MZAM.

[16] HMRC, Policy Paper: Cryptoassets: Tax for Businesses, supra note 8. 

[17] HMRC, Policy Paper: Cryptoassets: Tax for Individuals, supra note 4.

[18] Id. 

[19] Id. 

[20] Id. 

[21] Id. 

[22] Id. 

[23] Taxation of Chargeable Gains Act 1992, § 104. See also HMRC, Policy Paper: Cryptoassets: Tax for Individuals, supra note 4. 

[24] HMRC, Policy Paper: Cryptoassets: Tax for Businesses, supra note 8. 

[25] Id.

[26] Id.

[27] Blockchain & Cryptocurrency Regulation 2021: United Kingdom, Global Legal Insights, supra note 3.

[28] HMRC, Policy Paper: Cryptoassets: Tax for Businesses, supra note 8. 

[29] Comparative Guide: Blockchain, Mondaq, https://perma.cc/ME8K-FA3C.

[30] Id. 

[31] Taxation of Chargeable Gains Act 1992 § 52(4).

[32] HMRC, Policy Paper: Cryptoassets: Tax for Individuals, supra note 4. 

[33] Id.

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Last Updated: 02/05/2021