The State Administration of Taxation and Customs sent out ten thousand warning letters: A comprehensive interpretation of the UK's regulatory trends on encryption asset taxation.

Written by: FinTax

Introduction

According to statistics, the HM Revenue and Customs sent warning letters to about 65,000 individuals suspected of evading cryptocurrency taxes in the 2024-2025 tax year, more than doubling the number from last year. The HMRC stated that it will use data from cryptocurrency service providers to track tax evasion, and from 2026 onwards, it will obtain more detailed user transaction information based on the OECD Cryptoasset Reporting Framework. This initiative reflects the increasingly strict tax regulation and enforcement trends in the UK regarding cryptocurrency assets. In addition to sending reminder letters, the HMRC also updated a series of detailed cryptocurrency tax guidelines in the first half of 2025, providing tax guidance for individuals and companies holding or disposing of cryptocurrency assets. Individuals receiving cryptocurrency through work or activities such as mining, staking, lending, or liquidity pool rewards need to include it in their income tax, and when selling, exchanging, or gifting cryptocurrency, they must pay capital gains tax. Companies must pay corporation tax on their profits and revenues.

This article intends to systematically sort out the regulatory and tax system for crypto assets in the UK, aiming to provide tax references for crypto asset investors and practitioners in the crypto industry.

1. The definition and classification of crypto assets in the UK

In the 2023 revision of the 2000 Financial Services and Markets Act, the UK defined crypto assets as any digital representation of value or contractual rights that is protected by cryptography, can be transferred, stored or traded electronically, and utilizes technology that supports the recording or storage of data (which may include distributed ledger technology).

On April 29, 2025, the UK Treasury published the legislative draft “Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Crypto Assets) Regulations 2025,” which specifies the categories of regulated crypto assets and regulated crypto asset activities. According to the regulations, qualified crypto assets within the category of regulated crypto assets refer to interchangeable and transferable crypto assets. This definition excludes electronic money, fiat currency, central bank digital currency, and crypto assets that cannot be transferred or sold in exchange for money or other crypto assets, except through redemption by the issuer, or crypto assets that can only be used to purchase goods or services from the issuer or a limited network of service providers. Among them, qualified stablecoins refer to crypto assets that seek or claim to maintain a stable value by holding or arranging for the holding of fiat currency or fiat currency with other assets by the issuer, which does not include crypto assets that represent a right to repayment of amounts received in the form of deposits. Regulated crypto asset activities include the issuance of stablecoins, arranging transactions in qualified crypto assets, staking qualified crypto assets, and operating qualified crypto asset platforms.

2. Evolution of the UK Crypto Asset Regulatory Framework

Since 2022, the UK government has focused on the emerging field of crypto assets, categorizing them as regulated financial services, drafting regulatory proposals and applicable guidelines, and gradually integrating crypto assets into the mainstream financial regulatory and tax systems.

In April 2022, the UK government committed to introducing a new regulatory framework for crypto assets to address the risks and opportunities they present. In October 2023, the UK Treasury published detailed proposals for establishing a financial services regulatory framework for crypto assets, including stablecoins. On November 21, 2024, the government confirmed it would continue to implement this framework, which is broadly consistent with the proposals previously announced.

On April 29, 2025, the UK Treasury released a legislative draft titled “Financial Services and Markets Act 2000 (Regulated Activities and Miscellaneous Provisions) (Crypto Assets) 2025 Regulations,” along with a policy statement. To ensure legislative consistency, the draft simultaneously amends the 2005 Financial Promotion Order to ensure that changes in the definition of crypto assets in the regulations can apply to the Financial Promotion Order. It also simultaneously amends other secondary legislation, such as the 2011 Electronic Money Regulations, and abolishes the temporary provisions in the 2017 Anti-Money Laundering Regulations that allowed crypto asset companies registered with the Financial Conduct Authority to approve their own financial promotion activities.

For crypto asset intermediaries, the UK's Financial Conduct Authority (FCA) stated that its regulatory approach for intermediaries will be based on an international framework. Its goal is to regulate intermediaries according to the principle of “same risk, same regulation,” while also considering the characteristics of the broader crypto asset market. In May 2025, the FCA listed the improvement of the crypto asset regime as a priority in its work plan for 2025-2026, and on September 17, 2025, it published a consultation paper on minimum standards aimed at allowing rapidly growing cryptocurrency companies to participate in international competition, recommending the abandonment of four principles for crypto asset trading platforms.

In addition, the UK HM Revenue and Customs updated a series of cryptocurrency tax guidelines in the first half of 2025, providing detailed guidance for relevant tax arrangements.

3. Overview of the UK's Crypto Asset Taxation System

At the legislative level, the UK HM Revenue and Customs considers crypto assets to be intangible assets, rather than currency or money. Therefore, their taxation is levied according to existing principles of property and capital gains, rather than through foreign exchange or currency conversion rules. The UK has incorporated the taxation of crypto assets into its existing system, focusing on the ownership and disposal of assets, with personal taxation employing a dual structure of income tax and capital gains tax. At the same time, UK crypto asset taxation emphasizes substantial economic benefits, adopts a technology-neutral principle, is widely applicable, and avoids mentioning specific crypto technologies or networks.

At the enforcement level, the UK's taxation of crypto assets relies on individual responsibility and self-reporting. However, starting in 2026, the UK will implement the OECD crypto asset reporting framework, requiring crypto asset service providers to report user data directly to HM Revenue and Customs, making personal crypto asset taxation more transparent.

In the first half of 2025, the UK HM Revenue and Customs updated a series of tax guidelines for individuals and companies regarding crypto assets, with specific rules as follows:

3.1 Tax Rules for Individuals

At the legislative level, the tax rules regarding individuals holding and disposing of cryptocurrency assets mainly involve the distinction of tax types and tax reporting rules; at the enforcement level, the UK HM Revenue and Customs has a trend towards stricter regulation of personal taxes on cryptocurrency assets.

3.1.1 Types of Taxes Involved

Personal taxation of crypto assets mainly involves three types of taxes: income tax, capital gains tax, and inheritance tax.

(1) Income Tax

If an individual obtains cryptocurrency assets through work or activities such as mining, staking, lending, or liquidity pool rewards, it may trigger income tax and national insurance contributions. This includes any income obtained from decentralized finance (DeFi). Cryptocurrency assets obtained through mining, staking, or lending, if not traded, are considered “other taxable income.”

In terms of the tax-free allowance, individuals can receive a maximum trading and miscellaneous income tax-free allowance of £1,000 per year, and income from crypto assets counts towards this allowance. Individuals with total miscellaneous income between £1,000 and £2,500 need to contact HM Revenue and Customs, and those exceeding £2,500 must register for self-assessment.

Individuals need to check whether their crypto assets are classified as readily convertible assets, with Bitcoin and other cryptocurrencies falling under this category:

If income is easily convertible assets, UK employers must first pay employees' income tax and national insurance contributions through PAYE before paying wages to employees. If employers pay wages in the form of crypto assets, they will estimate the value of the crypto assets and pay income tax and national insurance contributions based on the estimate, and then deduct those taxes from the current wages. Employees are responsible for checking and ensuring that the correct tax is paid to HM Revenue and Customs.

If income is not easily convertible assets, employees should ask their employer whether income tax has been paid through the PAYE system. If not, they will need to pay it themselves. To pay their own income tax, they must fill out a self-assessment tax return in pounds.

If you sell cryptocurrency assets that have already been taxed in the future, you should calculate capital gains tax normally based on any increase in the value of the cryptocurrency assets after receiving them.

(2) Capital Gains Tax

For most individuals holding cryptocurrencies as investments, capital gains tax must be paid when disposing of (disposing of) assets. Disposal actions may include selling cryptocurrencies for fiat currency, exchanging one cryptocurrency for another, using cryptocurrencies to purchase goods or services, or gifting cryptocurrencies (excluding gifts to a spouse or cohabiting partner).

Regarding the tax-free allowance, the annual tax-free allowance for most individuals' capital gains tax has been reduced, and any total gains exceeding this allowance must be reported. The annual capital gains tax tax-free allowance for the 2024-2025 tax year has been lowered to £3,000 and will remain at this level for the 2025-2026 tax year.

Regarding tax rates, the capital gains tax rate will change on October 30, 2024. Before October 30, 2024, the basic tax rate is 10%, and the higher tax rate is 20%. Starting from October 30, 2024, the basic tax rate will be 18%, and the higher tax rate will be 24%.

When calculating personal gains, gains usually refer to the difference between the purchase price and the selling price of an asset. However, in cases such as the transfer of crypto assets between related parties, fair value should be used to calculate gains. When calculating gains, allowable costs can be deducted, and capital losses from other assets can be used to offset gains when reporting to HM Revenue and Customs. If income tax has been paid on any part of the value of the crypto asset, there is no need to pay capital gains tax on that portion of the value.

For the calculation of profits from the sale of cryptocurrency assets after 30 days of purchase, pooling rules apply. Each type of cryptocurrency asset owned is grouped into “pools”, and the average cost of each type of cryptocurrency asset is calculated. Each time cryptocurrency assets are purchased or received, the amount paid should be added to the corresponding pool. When disposing of cryptocurrency assets, a proportional amount of the pooled cost and other allowable costs should be deducted. Allowable deductible costs include transaction fees, advertising for buyers or sellers, drafting transaction contracts, valuations for calculating transaction profits, and a portion of the pooled costs of cryptocurrency assets.

For those who purchase the same type of cryptocurrency on the same day or within 30 days of selling the same type of cryptocurrency, the cost of purchasing the cryptocurrency is not aggregated. In this case, the rules for calculating costs are the same as for calculating stock costs, applying the “bed and breakfast” rule, where the gain or loss from disposal is the difference between the net proceeds from the previous disposal and the cost incurred thereafter.

For each crypto asset pool, a separate record must be kept for each transaction, including the type of crypto asset, disposal date, quantity of crypto assets disposed of, quantity of remaining crypto assets, the pound value of the crypto assets, bank statements, and the aggregate costs before and after disposal.

(3) Inheritance Tax

Cryptographic assets are considered part of the inheritance tax estate, and the location of the cryptographic assets is usually determined by the tax residency of the beneficiary.

3.1.2 Personal Tax Reporting Rules

In May 2025, the UK's HM Revenue and Customs issued new guidelines stating that individuals must provide personal information to cryptocurrency service providers before the reporting rules come into effect on January 1, 2026. This rule applies to all service providers that allow the purchase, sale, transfer, or exchange of cryptocurrency assets, including those not headquartered in the UK but providing services to UK users, and requires individuals to maintain detailed records, including types of cryptocurrency assets, acquisition dates, acquisition costs, disposal dates, disposal proceeds, fees, wallet addresses, etc.

Starting from January 1, 2026, the UK will introduce reporting rules for crypto asset service providers based on the OECD crypto asset reporting framework. Crypto asset service providers will collect and report user and transaction data to HM Revenue and Customs. The first report must be submitted to HM Revenue and Customs by May 31, 2027, covering the period from January 1, 2026, to December 31, 2026.

3.1.3 Trends in Personal Tax Regulation

The UK's HM Revenue and Customs is sending out up to 65,000 reminder letters to crypto asset investors in the 2024-2025 tax year to urge them to pay any unpaid taxes before launching formal investigations. This amount more than doubles the 28,000 letters sent in the previous year, indicating that UK tax authorities are intensifying their regulatory efforts regarding taxation of crypto assets.

3.2 Tax Regulations for Enterprises

Companies are required to pay corporate tax on their profits and earnings. The tax for partnerships or limited partnerships passes through to their members, and member companies must pay corporate tax on their share of the profits and earnings from the partnership. The UK HM Revenue and Customs does not consider any current type of cryptocurrency to be currency, and any corporate tax laws solely related to currency do not apply to cryptocurrencies.

3.2.1 Application of Tax Regulations

(1) Section 5 of the Company Tax Law 2009 Rules on Loan Relationships

Simply acquiring cryptocurrency assets does not involve a lending relationship and is not subject to lending relationship rules. If cryptocurrency assets have been provided as collateral for a regular money loan, a lending relationship exists, and the lending relationship rules apply whether the company is the debtor or the creditor.

(2) Section 8 of the 2009 Company Tax Act Intangible Fixed Assets Rules

If crypto assets are considered “intangible assets” for accounting purposes and are used for ongoing use, companies that account for crypto assets as intangible assets may be subject to taxation under the corporate tax rules for intangible fixed assets.

3.2.2 Situations Where Corporate Tax Is Required

If a company holds cryptocurrency assets as investments, it is obligated to pay corporate tax on any profits gained from the disposal of cryptocurrency assets. If an individual entrepreneur holds cryptocurrency assets as investments, they are obligated to pay capital gains tax on any profits realized. If a partnership or limited partnership holds cryptocurrency assets as investments, its members are obligated to pay corporate tax (if a corporation) or capital gains tax (if an individual) on any profits realized.

If a company gifts cryptocurrency assets to other companies not belonging to the same group, or to individuals or other entities, the disposing company must calculate the fair value of the gifted cryptocurrency assets and compute the taxable income based on this value. The recipient is considered to have acquired the cryptocurrency assets at their fair value at the time of the gift.

If the company retains ownership of the gains from cryptocurrency assets throughout the trading process, there will be no disposal, such as moving cryptocurrency assets between public addresses controlled by the company. Using a mixer or similar services to have the company receive the same type of cryptocurrency assets that it invested in the trade does not constitute disposal. If the company puts cryptocurrency asset A into the trade and receives cryptocurrency asset B, it constitutes disposal.

If a taxpayer donates cryptocurrency assets to a charity, they are not required to pay corporate tax on any realized gains unless they make a “tainted donation” or sell the cryptocurrency assets to the charity at a price higher than the acquisition cost, thus realizing a gain.

3.2.3 Calculation of Taxable Income for Corporate Tax

The calculation of taxable income for corporate tax applies the pooling rules (similar to personal capital gains tax), but there are the following exceptions:

If a company disposes of the same type of cryptocurrency asset on the same day it acquires that type of cryptocurrency asset, the disposal will be matched with the cryptocurrency assets acquired on the same day, taking precedence over any cryptocurrency assets held in the existing pool.

If a company acquires a cryptocurrency asset that would originally be created or added to the pool, but disposes of similar cryptocurrency assets within 10 days, that disposal will match the acquisition made within the previous 9 days, taking precedence over any cryptocurrency assets currently held in the pool. If multiple acquisitions occur during this period, the “first in, first out” principle applies.

4. Outlook on the UK's Cryptocurrency Taxation System

The current tax rules in the UK treat crypto assets the same as other assets, imposing equal taxes on economic value without distinction of form. This reflects the UK government's general recognition of crypto assets as assets, particularly its focus on the economic substance of crypto assets. In this regard, crypto asset investors should also clearly understand the asset nature of crypto assets, be aware of the crypto asset tax rules, clarify potential tax obligations, and strengthen self-examination and proactive disclosure of crypto asset tax information to avoid tax evasion.

Recently, the UK Tax Authority has sent out reminder letters indicating its stringent regulatory stance on cryptocurrency taxation. As the UK Tax Authority obtains more data, it may further intensify its tax collection efforts against cryptocurrency investors. Those who have not declared capital gains from cryptocurrency assets will find it increasingly difficult to evade tax authorities' audits, and various forms of offshore tax evasion will also become a focal point for tax authorities.