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One of the most common areas of confusion in UK crypto tax is whether activity is taxed under Capital Gains Tax or Income Tax.
The distinction matters. Different tax rates apply, tax is triggered at different points, and the way amounts are calculated is not the same.
This guide explains how HMRC decides which tax applies, using the 2025–2026 UK tax year rules. It focuses on situations individuals commonly encounter: trading versus investing, staking rewards, airdrops, and mining.
The explanations assume a UK resident individual acting personally, not through a company. The aim is to explain HMRC’s approach clearly, not to provide personalised tax advice.
Capital Gains Tax vs Income Tax: The Basic Idea
At a high level, HMRC draws a line between two things:
Capital Gains Tax
Usually applies when you dispose of crypto you already own.
Income Tax
Usually applies when you receive crypto as a reward, payment, or return for an activity.
Some crypto activity sits close to the boundary between the two. In those cases, HMRC looks at the facts rather than labels. You cannot choose which tax applies. The treatment follows from the nature of what you are doing.
When crypto is taxed as income, it is added to your other income for the year and taxed at your marginal income tax rate.
This means the tax rate is not fixed. Depending on your total income, income from crypto may be taxed at:
- 20% (basic rate)
- 40% (higher rate)
- 45% (additional rate, over £125,140)
Current 2025–26 Capital Gains Rates
For the 2025–2026 tax year, crypto gains use the settled CGT rates for other assets:
- 18% within the unused basic rate band
- 24% above that band
There is no mid-year split for 2025–2026 returns, so you do not need to separate gains into pre- and post-Budget periods.
Trading vs Investing
HMRC’s Starting Position
HMRC’s starting assumption is that most individuals are investors, not traders.
- Buying crypto and later selling it is taxed under Capital Gains Tax
- Even frequent buying and selling does not automatically make it a trade
Only in relatively limited circumstances will HMRC treat crypto activity as trading income.
How HMRC Decides
There is no single test. HMRC looks at the overall pattern of activity, including:
- How often trades occur
- Whether activity is organised and systematic
- Whether there is a clear intention to generate short-term profits
- The amount of time and effort involved
- Whether the activity resembles a commercial operation
Most individuals never cross this line.
1Example: Investing (Capital Gains Tax)
What happens
- Someone buys crypto periodically
- Holds it for weeks or months
- Sells when the price rises
Tax treatment
- Each sale is a disposal
- Capital Gains Tax applies
- Gains reduced by annual allowance (£3,000)
This is the most common position.
2Example: Systematic Trading Using a Bot
Consider someone running an automated bot, executing continuous trades with defined strategies, aiming for regular short-term profits.
Even if personal, HMRC may view this as trading. If so:
- Profits treated as income
- Income Tax applies
- Losses follow income tax rules
Note: Using a tool doesn't automatically make you a trader. HMRC looks at the full picture.
Staking Rewards
HMRC’s General View
Staking rewards are generally treated as income.
From HMRC’s perspective, staking involves receiving something of value in return for participating in a network or making assets available. That makes the rewards closer to income than to capital growth.
When the Tax Point Occurs
Income tax arises when the staking reward is:
- Received, and
- Available to the individual
The taxable amount is the pound value of the tokens at that time, even if they are not sold.
What Happens When You Sell Later
If staking tokens are later sold:
- Capital Gains Tax may apply
- The acquisition cost is the value that was already taxed as income
This ensures the same value is not taxed twice.
Example: Staking Rewards
Scenario (Higher Rate)
Received £1,500 worth of staking rewards during the year.
Tax Due
£1,500 treated as income.
£600 Tax (40%)
Any future increase in value above £1,500 is subject to Capital Gains Tax.
Airdrops
Airdrops are not all treated the same way. The key distinction is between:
- Tokens received without doing anything
- Tokens received because of an activity or service
No Action Required
If received without payment, services, or action:
- Often not taxable income at receipt
- CGT applies if later sold
- Acquisition cost may be nil
Linked to Activity
If linked to trading volume, liquidity provision, or usage:
- Likely taxed as income at receipt
- Taxed at market value in pounds
- Common with protocol rewards (e.g. Hyperliquid)
Mining
HMRC distinguishes between hobby mining and trading.
- Mining as a Hobby
- Small-scale, non-commercial. Rewards usually taxed as miscellaneous income.
Tax-Free Allowance: If your total miscellaneous income (including hobby mining, staking, airdrops) is under £1,000, it is generally tax-free and does not need to be reported. - Mining as a Trade
- Organised, regular, profit-driven. Profits treated as trading income. Income Tax and potentially National Insurance apply.
Keeping the Two Taxes Clear
HMRC expects you to clearly separate:
- Income events from disposal events
- Income Tax from Capital Gains Tax
- Receiving tokens from later selling them
Summary
- Capital Gains Tax usually applies when crypto you own is disposed of
- Income Tax usually applies when crypto is received as a reward or payment
- Most individuals are investors, not traders
- Systematic, organised activity may be treated as trading in rare cases
- Staking rewards are generally taxed as income
- Airdrops depend on whether participation or services were involved
HMRC focuses on behaviour and facts rather than labels. Where activity sits close to the boundary, careful analysis matters.
Need specific help with capital gains vs income?
BlockBooks handles complex UK scenarios including trading activity, staking rewards, airdrops, and mining.