The taxation of profits from buying and selling cryptocurrencies typically falls under one of three categories. HMRC has emphasised that the classification must be determined on a case-by-case basis. For an individual to be subject to Income Tax (or a company to be subject to Corporation Tax) on cryptocurrency gains, there must be clear evidence of a trading business. HMRC uses “badges of trade” to determine whether this is the case.
Not all “badges” need to be present for a trade to be considered; it’s the overall context of the activity and the combination of badges that will help decide if you are trading or simply investing in cryptocurrencies.
One of the major risks is that individuals who make substantial gains in cryptocurrency may be classified as traders by HMRC and taxed at the highest rate of Income Tax (currently 45%). Additionally, individuals taxed at this top rate will lose their tax-free personal allowance.
Given this potential risk, it’s advisable to review your cryptocurrency activities now. If your activities are more aligned with trading, consider transferring your holdings into a Limited Company structure, which can offer more favourable tax rates. With effective tax planning, a company structure can help you retain a larger portion of your gains.
For those investing in cryptocurrency, any gains will be subject to Capital Gains Tax (CGT). Each individual has an annual exemption of £3,000 (for the 2025/26 tax year). Any gains exceeding this threshold will be taxed at either 18% or 24%, depending on your total income for the same tax year.
In most cases, CGT will apply to cryptocurrency gains, but the specifics depend on your individual circumstances.
The buying and selling of cryptocurrencies themselves are outside the scope of VAT. However, services related to cryptocurrencies are subject to VAT, such as consultancy services or transactions where cryptocurrency is used for settling debts or purchasing goods. HMRC clarified this position in their Revenue & Customs Brief 2014 (9), issued in March 2014, and it has largely remained unchanged since.
It’s important to note that just because a transaction is settled using cryptocurrency doesn’t mean VAT isn’t applicable. For example, buying goods or services with Bitcoin still requires VAT to be charged in the same way as a transaction made with traditional currency. The VAT will be calculated based on the market value of the cryptocurrency at the time of the transaction.
Transfers of cryptocurrency assets between spouses or civil partners are currently exempt from CGT. This means you can transfer assets between you and your partner to maximize both of your annual CGT exemptions, effectively doubling the allowance. The transfer must be an outright gift.
If you have both gains and losses in the same tax year, they can be offset against each other to reduce the taxable amount of gains. However, any losses must be reported to HMRC within four years from the end of the tax year in which they occurred. Additionally, certain costs related to the buying and selling of cryptocurrency—such as transfer fees, exchange fees, and professional fees (e.g. accountants or lawyers)—can be deducted when calculating your CGT liability.
For further information or assistance with your cryptocurrency tax position, please contact us at admin@nealford.co.uk.
